HomeMy WebLinkAbout2018-04-03 Finance Committee Summary Minutes
Special Meeting
April 03, 2018
Chairperson Scharff called the meeting to order at 6:11 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Filseth, Kou, Scharff (Chair), Tanaka
Absent:
Oral Communications
None
Agenda Items
1. Recommendations on Proposed Fiscal Year 2019 Community Development Block Grant Funding Allocations (CDBG) and the Draft Fiscal Year 2019 Annual Action Plan.
Chair Scharff requested the presenters introduce themselves.
Eloiza Murillo-Garcia, Senior Planner and Erum Maqbool, Staff Specialist introduced themselves.
Ms. Magbool presented an overview of the Fiscal Year 2018/2019 Community Development Block Grant (CDBG) allocation process. This is a Principal Federal Program and Palo Alto receives
annual funding from the U.S. Department of Housing and Urban Development (HUD). The activities funded through CDBG must meet one of the three national objectives: 1) Benefit low and
very low-income persons; 2) Aid in prevention or elimination of slums or blight; 3) Meet other community needs that are particularly urgent for the low-income community. All City activities
funded by the CDBG meet the first objective. She stated that CDBG Federal appropriations for Fiscal Year 2018/2019 have not yet been determined so for budgeting purposes, City Staff
had estimated the City’s HUD Entitlement Grant at $392,678, based on a 10 percent reduction from the current Grant of $436,309. The total estimated funding available for allocation for
Fiscal Year 2018/2019 is $578,296. This is a combination of the estimated Entitlement Grant of $392,678, estimated Program income of $136,049 and $49,569 from prior year resources. The
CDBG has five funding categories for funding: 1) Public Services; 2) Planning and Administration; 3) Economic Development; 4) Housing Rehab; 5) Public Facilities. Per Federal Regulation,
there is a maximum spending cap on Public Services and Planning and Administration. The Public Services cap is 15 percent of the Entitlement Grant and 15 percent of actual Program income
received during the previous Fiscal Year, so the maximum that can be allocated in this category this Fiscal Year is $87,078. The five agencies under this category currently funded by
Palo Alto were listed on a slide with Fiscal Year 2018 allocation amounts, 2019 requested amounts and the recommended amounts by the Human Relations Commission (HRC). Planning and Administration
has a 20 percent spending cap on the Entitlement Grant and Program income from the following Fiscal Year. She stated the maximum that can be allocated for Planning and Administration
in Fiscal Year 2018/2019 would be $105,745. There is no cap on the other three funding categories. Project Sentinel and City of Palo Alto Administration are currently funded through
the CDBG Grant. The Fiscal Year 2018 allocation amount, Fiscal Year 2019 requested amount and the HRC recommendations were listed on a slide.
Vice Mayor Filseth questioned the whole allocation of about $580,000 of which $80,000 is CDBG Administration by the City.
Ms. Maqbool responded that the HRC recommended $73,000 but the requested amount is $85,000.
Vice Mayor Filseth estimated this is about 15 percent.
Ms. Maqbool responded yes.
Vice Mayor Filseth felt this seemed high.
Ms. Murillo-Garcia explained there is a 20 percent cap on planning and administration activities.
Council Member Kou remarked this was for all the programs.
Ms. Murillo-Garcia also explained that is for the on-going administration of the program and this year the amount is estimated to be much lower, but the program still had certain administrative
and reporting requirements.
Ms. Maqbool continued that under the Economic Development category, Downtown Streets is funded and for the Housing Rehab there is the Minor Home Repair Program. She explained that the
CDBG Program operated under a two-year funding cycle, and Fiscal Year 2018/2019 is the second year of the two-year funding cycle. Funding allocations were now required for Fiscal Year
2018/2019 and the funding recommendations have been reviewed by the HRC Selections Committee and the full HRC.
Chair Scharff asked what the Minor Home Repair Program was.
Ms. Maqbool explained this is a pilot program that would be started this year. Basically, this would provide services to senior citizens and disabled residents, such as grab bars, ramps,
etc. so they could live in their homes.
Council Member Kou inquired if this program would also do the Below Market Rate (BMR) projects or would that be under the Palo Alto Housing?
Ms. Murillo-Garcia responded that if she was referring to a BMR owner, if they needed some assistance they could possibly qualify if they were income-eligible.
Council Member Kou also asked if this was to just help them in their daily lives.
Ms. Murillo-Garcia stated this was for minor assistance. The limit is $10,000 and would be mostly focused an accessibility.
Ms. Maqbool reported that because the City has not yet received its entitlement amount from HUD, the HRC developed a Contingency Plan to distribute any increase or decrease in the Grant
amount. These recommendations were listed on a slide.
Council Member Kou understood that for budgeting purposes the number used was 10 percent less, but more was asked for on the application and inquired if the $578,000 was the amount asked
for.
Ms. Murillo-Garcia asked if Council Member Kou was inquiring if this was the application to HUD.
Council Member Kou replied yes and asked what the amount requested from HUD would be.
Ms. Murillo-Garcia stated the amount was not yet known.
Council Member Kou asked how that worked.
Ms. Murillo-Garcia explained that HUD comes out with the number, but the City still must go through the budgeting process even though the amount is not known. That’s why a contingency
plan was necessary.
Council Member Kou inquired about the administration costs for Palo Alto that seemed rather high, and if there were things the City could do to reduce those costs. She asked if this
was something Staff could look into and think about.
Sherry Nikzat, Senior Management Analyst responded that there was a lot that went into CDBG with Federal Grants, contract administration, audit ready, etc., and much effort was made
to keep costs as low as possible.
Council Member Kou asked approximately how many departments were involved and how many Staff members.
Ms. Nikzat replied that Ms. Garcia and Ms. Magbool were primarily involved in planning, but Administrative Services was also involved.
Council Member Kou then understood there were mainly two and then others all around.
Vice Mayor Filseth noted as he understood it, if the HUD Grant was less than budgeted, the plan was to basically keep Project Sentinel and Downtown Streets fully funded and take it out
of Public Service and the Minor Home Repair Program, and the City will pick up more of the overhead.
Ms. Murillo-Garcia replied that for Public Services there is a cap, so that would potentially have to be reduced, not to necessarily take the money from that category and reallocate
it, but just to stay within the cap. It could potentially be less than the $87,000 that was anticipated. The plan would be to give each agency no less than $5,000 and then to reduce
everybody proportionately.
Chair Scharff stated he viewed the Committee’s role as providing a brief oversight of what the HRC is doing. He asked if these things could be gone over and what the reasoning would
be for their prioritizing one thing over another.
Ms. Murillo-Garcia explained that the HRC has a three-member Selection Committee which looked at the applications from last year and this year. They felt these two organizations, Project
Sentinel and Downtown Streets, were very focused on Palo Alto and funding for them was very important. Downtown Streets did very visible work in the City and Project Sentinel provided
fair housing services in the City.
Chair Scharff inquired if they had any metrics, what was accomplished with the money given to them. He knew what Downtown Streets did. He was curious about Project Sentinel, were there
numbers of fair-housing complaints, what have they accomplished.
Ms. Maqbool advised they were looking into this.
Chair Scharff also asked about the Minor Repair Fund and understood this was up to $10,000. He inquired if this funded the whole thing, was there a group that did this or was it a City-sponsored
thing, was there a big budget and the City was giving a small part of it, or the entire budget for the home repair.
Ms. Maqbool responded since this was a pilot program, the issues that could be solved were in the draft guidelines.
Chair Scharff reiterated that his question was if this was a pilot program by the City.
Ms. Maqbool clarified that it was a City pilot program.
Chair Scharff asked if there was no other funding other than the $50,000.
Ms. Magbool acknowledged that the $10,000 for each household was the only funding.
Chair Scharff asked why the amount was set at $10,000.
Ms. Murillo-Garcia responded that in the current Fiscal Year 2017/2018 the City allocated about $150,000 for that program. It took longer to get underway, so the recommendation was to
add an additional $50,000 so there was about $200,000 total for the program, which was about 20 households.
Chair Scharff inquired where the other $150,000 came from.
Ms. Murillo-Garcia noted that was from CDBG from the current year.
Chair Scharff clarified that it was all CDBG, about $200,000 and this was the first year the program would be used.
Ms. Murillo-Garcia responded yes.
Chair Scharff reiterated that after the pilot program there would be a better sense of what was needed.
Ms. Murillo-Garcia stated yes, how successful it was, if expansion was needed.
Chair Scharff questioned what metrics would be used to measure success.
Ms. Murillo-Garcia remarked they anticipated servicing about 15 to 20 households per year and that is how they would measure how the program got utilized.
Chair Filseth suggested they come back at the end of the pilot with some metrics of success. These should not just be utilization of the project, but specific services and projects accomplished
to support the amount requested.
Ms. Murillo-Garcia indicated they would make a note of that and bring back those types of metrics.
MOTION: Chair Scharff moved, seconded by Council Member Kou to recommend to the City Council take the following actions:
Allocate Community Development Block Grant (CDBG) funding as recommended in the Draft 2019 Action Plan and as described in this report, including the contingency plan policies recommended
by the Human Relations Commission (HRC);
Authorize the City Manager to execute the Fiscal Year 2018-2019 CDBG application and 2019 Action Plan for CDBG funds, any other necessary documents concerning the application, and to
otherwise bind the City with respect to the applications and commitment of funds; and
Authorize Staff to submit the 2019 Action Plan to Housing and Urban Development (HUD) by the May 15, 2018 deadline.
MOTION PASSED: 4-0
2. Utilities Advisory Commission Recommendation That the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2019 Water Utility Financial Plan; and (2) a Resolution Increasing
Water Rates by 4 Percent by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service From Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential
Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service.
Chair Scharff clarified the Utility Financial Plan was first then Water.
Ed Shikada, Assistant City Manager and Utilities General Manager, indicated that at this meeting rate reviews and financial plans for the Water Utility and Wastewater Utility would be
presented. He stated next month the Electric and Natural Gas Utilities would be presented.
Eric Keniston, Senior Resource Manager started with a comparison of median bills to other nearby agencies and indicated Palo Alto is doing better than anyone immediately adjacent to
us.
Vice Mayor Filseth indicated he did not care for this comparison.
Chair Scharff felt Electric should be taken out of the equation and comparison should be Wastewater-to-Wastewater, Gas-to-Gas and Water-to-Water. He also remarked that homeowners had
a completely different bill structure than people living in a studio apartment and thought lumping all this together created a meaningless statistic.
Council Member Tanaka asked which of the cities listed had their own utilities.
Mr. Keniston explained that Santa Clara had their own Electric Utility and for Water, Menlo Park and Los Altos were under California Water Service. The remainder all had their own municipals.
Vice Mayor Filseth noted they were all the same because they were Pacific Gas & Electric (PG&E).
Mr. Keniston stated except for Santa Clara, and Wastewater every agency had their own.
Council Member Tanaka remarked that Palo Alto had a tremendous amount of capital tied up into owning its utilities and the cost of capital was not shown on this. He believed to do this
kind of comparison, there should be a separation between those who had their own utilities and those who did not, because of the cost of capital.
Jon Abendschein, Assistant Utilities Director reiterated that a range of comparisons was done, direct utility-to-utility comparisons and bills from a wide range of customer types. These
were on backup slides.
Chair Scharff stated he would be interested in seeing those slides.
Vice Mayor Filseth commented that the return on interest was somewhat interesting but not really a valid comparison because you would have to be willing to sell off the utilities and
distribute the equity to the rate payers.
Council Member Tanaka responded that we could sell this off to PG&E and use that money
Mr. Keniston explained the next slide showed the proposed rate increases for the Water, Wastewater and Gas. The overall bill increase proposed for this year was 5 percent. A rate increase
of 4 percent was proposed for Water and Wastewater. The next slide showed Fiscal Year 2019-2028 cost projections and revenues. Revenues were projected to be below expenses, but this
Utility had fairly healthy reserves. The orange bars on the slide indicated a jump in capital investment costs. Over the next three years there would be the need to look at doing some
seismic improvements for reservoirs and tanks and allocating $2 million a year to the Capital Improvement Program (CIP). He noted in Fiscal Year 2021 there was a projection of about
$4 million in costs related to changing out all meters to Smart Meters, subject to change. Also noted, in all years there were main replacement projects and estimated costs went up based
on current dollars. Over the long term, however, increases in the water supply cost from San Francisco Public Utilities Commission (SFPUC) was really driving up costs.
Council Member Tanaka stated he was looking at operations and from 2013 to 2016 and into 2017, it looked like operation costs had been held steady if not going down. He noted, typically
when making capital investments, it was to improve operational efficiencies, so as capital investments were boosted you would think the operational efficiency would get better, but it
looked worse every year. He questioned why make the massive capital investments and have operational efficiency go down.
Mr. Keniston explained for the operation costs in the short term some savings was seen from having a lower Staff level.
Council Member Tanaka suggested maybe Utilities could operate without that staffing level and questioned why that level was needed.
Mr. Shikada responded that the staffing level was due to vacancies. There was no relationship between the operating expenses and the capital expenses, because almost exclusively capital
is replacement or rehabilitation of the aging infrastructure so there was no operational savings by replacing a corroded water tank or replacing a water main that had reached its serviceable
life. The operating expenses that were down over the past few years were largely related to vacancies within the operating units.
Council Member Tanaka noted that if Utilities was able to operate for the past five years with these vacancies, why couldn’t they keep doing that, especially with better IT and software.
Mr. Shikada explained that this reflected the fact that they had been falling behind in some of the preventative maintenance activities that on an ongoing basis, Staff would be responsible
for.
Chair Scharff asked what these positions were and what was not being done that should have been done.
Mr. Abendschein articulated that some of it had to do with certain preventative maintenance activities, like being able to get through checking and replacing all the valves that were
needed to be checked and replaced.
Chair Scharff inquired if that was someone we haven’t hired.
Mr. Abendschein responded that for that particular position, it was more about turnover. There might be vacancies for a few months with multiple positions, so the work did slow down
and there were analogous issues in various parts of the Utility.
Mr. Shikada shared that over the course of time, probably over years, you would see a relationship in not replacing infrastructure that would lead to more breakage, failed valves, etc.
which would lead to additional repairs. If Staff was not hired to do the repairs, we would have longer out-of-service periods. We have crews that respond to breaks as they happen. Also,
over the past few years we have had a number of vacancies in the Engineering Staffing which led to a buildup in capital improvement projects.
Vice Mayor Filseth noted the plan to replace mains with more expensive material which would require less maintenance. This was actually fairly small, and he assumed the majority of the
operating costs would be people costs which should track wages in the City and inflation and COLA. There did seem to be a big jump from 2017 to 2018 and then it was flat after that.
Mr. Keniston confirmed there was a budget versus actual, so what was shown was the budget with full staffing level. In day-to-day there would be operational savings probably at the end
of the year.
Chair Scharff questioned why have a rate increase if there would be operational savings.
Mr. Keniston responded that they might see some operational savings, but there would also be increased CIP spending and supply costs.
Chair Scharff asked why the supply costs were going up. Previously it was because Hetch Hetchy was doing a massive improvement and asked if that was done yet.
Mr. Keniston replied no, that would be going on at least through 2021 and there is already a list of projects they will be starting after that is done, which is all the up-country work
and billions more dollars.
Chair Scharff asked how much of the rate increase is due to supply, looking at the 2017 rate increase mostly.
Mr. Keniston responded that about half the cost increase they were looking at through the period was related to supply costs.
Chair Scharff commented that everyone who gets Hetch Hetchy water would be paying that.
Mr. Keniston replied yes.
Chair Scharff remarked that when a main needed to be replaced it needed to be replaced but questioned why residents were better off with different meters if it would cost them a lot
more money. He asked what they would do if he wanted a 4 or 5 percent rate increase or they asked you to cut expenses by 20 percent. He noted from 2014 to 2017 operation costs were flat
and then they jumped up and you stated it was because you were going to fill positions. It seemed like suddenly they were getting ramped way up.
Mr. Keniston responded they increase 3 to 3.5 percent per year.
Chair Scharff acknowledged this was probably just thrown in as a budget thing, just increase 3.5 percent. He asked that capital investments be explained, asked why we need reservoirs
if we were getting our water from Hetch Hetchy.
Mr. Keniston explained that reservoirs were needed in case of an emergency here, an earthquake, emergency disaster, we had to have a certain amount of supply internally if we were cut
off. That was a compliance issue.
Chair Scharff inquired how much money was spent on resiliency. A small reservoir was just built. He wondered if too much was spent on resiliency.
Mr. Abendschein noted there was discussion about some of the things done to try to contain the increases in costs and look for possible savings in both capital and operations in the
Staff report. Overall, there was a requirement to be able to fulfill fire flows during a peak demand day for eight hours. A scenario was an earthquake where the supply was cut off and
fires within the City had to be fought. Our system of reservoirs and wells would be what fulfilled that requirement. The costs associated with that, the debt service, was associated
with the reservoir mentioned in El Camino, as well as rehabilitation of the well. The increases in costs seen in ’19, ’20 and ’21 were related to reservoir rehabilitation. The reservoirs
were old enough that they needed to be rehabilitated. It was more and more challenging to maintain water quality because of corroded infrastructure on the inside. In the reservoirs that
needed to be rehabilitated and seismically strengthened it was found that there might be opportunities to reconfigure the reservoirs to, first, achieve some operational savings and second,
to save on capital. Water quality is being maintained. He remarked there was a study going on right now on exactly how that could be achieved. Opportunities were looked at to contain
costs, but that did not mean costs were not going up.
Vice Mayor Filseth observed that on this chart and in several other places the rate increases historically have been 6 or 7 percent going out several years. Then starting about four
to five years from now it suddenly drops to about 1 percent. This looked the same for Wastewater and other utilities. He questioned if in the out years operations costs were going up
3 to 3.5 percent, capital investment is getting more expensive with higher interest rates and higher construction costs, water supply costs increasing, how was a 1 percent increase in
the out years realistic.
Chair Scharff asked if the ones before 2013 were available, what the general rate increases for water were since about 2010 or 2009 or 2008.
Vice Mayor Filseth thanked Staff for putting some of the previous years’ projections in so it could be seen how these changed over time.
Mr. Keniston responded that he did not have the history chart with him at this meeting going back that far.
Council Member Tanaka questioned why, if some of these people were for occasional capital investment projects, why not outsource this to a consulting firm to engineer a project for us,
instead of adding to our head count and pension liability.
Mr. Shikada explained that he was talking to Kiely and the 2018 figure included the 115 Trust, so that was part of what had changed in the short term. To Council Member Tanaka’s point,
the general work as it related to specifically Water engineering here, this was bread-and-butter work, not replacing existing infrastructure. Ultimately, a policy decision, a management
decision could be made to outsource that work. On an on-going basis, this was very consistent in terms of the nature of the work and the volume of work. It was not occasional main replacement,
but annual main replacement done all year, every year.
Council Member Tanaka asked if they had these vacancies for five years, then how could it be so regular.
Mr. Shikada interjected that they were able to smooth out the fluctuations that occurred because of vacancies in personnel.
Council Member Tanaka questioned if it would not be more efficient to just outsource it because it was done once in a while, that was what it looked like. Also, he wondered if now was
the best time to be making a huge amount of capital investment. Bids were coming back double or triple the cost, only single bidders, construction companies not returning calls. Could
we push this out a couple of years? Maybe in a few years the projects could be done at a fraction of the cost. He asked if it was super urgent that these projects needed to be done now.
Mr. Shikada replied yes. Capital replacement was something done over time. It was like any type of portfolio or risk management. You didn’t plan to make a major replacement of a capital
infrastructure within a small period of time. Spreading it out over time was actually a prudent risk management strategy because it wouldn’t age and be due for replacement at a pulse
point. It did take about a year from initiating a project to get it to bid, then another year for actual completion of construction. The ongoing work is not really cyclical. The fluctuations
seen in prior years had been due more to the fluctuations in staffing than due to a desire to deliver the projects. He reiterated it was a valid policy question regarding the balance
of what in-house versus outsource staffing should be. In this particular case, and based on his experience, the nature of the work was bread-and-butter. It was work that was needed every
year on an on-going basis and it was very consistent in terms of its nature. It was not the kind of situation in which bringing in consultants who had special expertise would be better
because there was benefit of knowledge of the existing system.
Chair Scharff agreed that everything said was probably true with the exception of possibly the reservoir upgrades. That was probably a timing issue that could be done a year later.
Mr. Shikada noted they were currently in the planning process on the reservoir replacement. They were looking at the alternative to simply replacing in kind the existing reservoirs.
They recognized both the dollar value involved with that replacement as well as the timing question. He stated they were using a consulting company for the evaluation and would probably
do the same for the design, because it was a specialized design that in-house Staff did not do on a regular basis.
Mr. Keniston pointed out the next slide which detailed where the cost increases were seen over time, that 50 percent of it was related to the increases seen in the water supply. The
remaining increases were split about 50/50 between operations and capital improvement. He explained that water was currently in a healthy reserve position, operation reserves were at
max, there was money in rate stabilization and some in capital reserves. Some money that was above the operations max limit will be spent, but with the current cost plan all the available
unassigned and rate stabilization capital reserve will be tapped through by 2021 and will be down to just operation reserves. The plan would be to keep reserves right near target for
the entire forecast horizon and well above risk assessment levels.
Chair Scharff was confused about the operations reserve target.
Mr. Keniston apologized that he skipped ahead to Slide Number 8. The money that would be used to fund the amount that revenues were under expense would all come from those unassigned
and rate stabilization and operation reserves. By doing that the reserves would still be kept within the guideline levels, so the water side would not get too low.
Chair Scharff asked what the guideline levels were.
Mr. Keniston replied that the guideline levels were set at a percentage of operations expenses, 90 days and 150 days.
Chair Scharff clarified that was the line that said minimum.
Mr. Keniston answered reserve minimum and reserve maximum.
Chair Scharff commented that was why it went up, because operations costs were expected to go up.
Mr. Keniston stated that as operation costs increased more than the 90 days had to be held.
Chair Scharff asked if this was supply costs.
Mr. Keniston replied yes.
Chair Scharff remarked that we didn’t get close to it.
Mr. Keniston answered that this fund wouldn’t get close to it.
Chair Scharff continued that the proposal was for a 4 percent rate increase, the change in the commodity portion of the rate to bring it in line with what the SFPUC was currently projecting
their wholesale cost to be for FY’19. We would not get their final rate until it was too late, usually by late May. In previous years only the commodity side was increased, but now we
would increase the distribution portion of the rate also.
Chair Scharff asked Mr. Keniston to explain what that means.
Mr. Kensiton stated there were really two different costs in the rates. There was the cost related to fund distribution, a fixed charge that went to fund distribution costs. Regarding
the commodity there was the cost for the SFPUC water. Every year we receive an estimate from the SFPUC what they thought their rate would be. We use this estimate to notice customers
by May 4 for the Council hearing in June, and in order to meet all the legal requirements for us to increase rates. The SFPUC then might come back after the notices were mailed out with
a rate that would be higher or lower than their estimate. Last year the SFPUC said they were planning on a big increase so our estimate was a little bit higher. The SFPUC rates were
not as high as expected so we rebalanced the rates, dropped the commodity portion and brought up the distribution portion. Where it would become relevant is every year for the past several
years we have discussed the option of passing through the commodity costs from the SFPUC. We would notice this once and explain that for the next five years, when we received the SFPUC
rate, that would be the rate charged. Right now, if the rate was changed and it’s not in our favor, it would come out of reserves.
Chair Scharff questioned why that is not a better system.
Vice Mayor Filseth thought that was done already.
Chair Scharff stated he would be much more comfortable saying we couldn’t control what SFPUC charged us, so that would be passed through to customers and we would worry about we would
control.
Vice Mayor Filseth commented that it looked like the distribution side had gone up faster, the commodity side went down a little so costs were shifted between the two.
Mr. Keniston explained that next year they planned a cost-of-service study and would look at meter charges and possibly bring forth that and doing the commodity pass through.
Vice Mayor Filseth noted that other cities that are experimenting with other kinds of variations of bills and asked if Staff was looking at those kinds of things.
Mr. Keniston stated some evaluations could be made when the next cost-of-services is done. They are looking at updating the existing one but some of that might take a more in-depth
analysis.
Mr. Shikada noted that currently it’s done by the size of the meter, the diameter of the meter. There are several variations on the theme they want to look at. One is related to an audit
that was done on prior meter charges. They are looking at collapsing several of the meter size charges, reduce the number of tiers that exist. That might go in the opposite direction
of what was pointed out in terms of the potential variations. They would need to look at whether the half-inch, five-eights, one-inch meter sizes are related to single family and how
that correlates to the size and type of home. Another is understanding that some other Utilities put a fixed portion of a meter onto the property tax bill so that’s an area that could
be looked at. It’s more a method of billing than an absolute dollar amount but to the extent that it more accurately reflects fixed costs versus variable costs, that may be a topic for
the Council to discuss, including who pays in that scenario. To the extent that it is on the property tax, it would be the property owner. If it is a rental, then there is a question
of whether that is passed through from the owner to the renter. These are some variables they would want to look at over the course of the next year before they brought back the next
cost-of-service analysis.
Chair Scharff felt the reserves are too high, looking at the chart. He asked what the value was of having high reserves.
Mr. Keniston replied that the reserves ended up being higher at the end of FY’17 because money was collected through the drought rate surcharge. Before that was turned off, customers
started using water in droves, so more money was collected on that side.
Chair Scharff stated it looks like there is a lot of money here. The minimum is $6 million, and we were upwards at the low point of $8 million whereas right now we are at around $14
million. He questioned why we needed to have such a huge number especially if we go to passing through the commodity price. In other situations that has been suggested.
Mr. Abendschein replied that these reserves are not about variability in the SFPUC price, although they can help with that in certain situations. In their Administrative Services Department
there is a pretty reasonable rule of thumb that at least a few months of operating expenses need to be kept in reserve in order to be able to operate in case of an emergency.
Chair Scharff indicated he wasn’t suggesting they go below the minimum reserve, just asking why they are not closer to it.
Mr. Abendschein noted the sort of rule of thumb is 90 days of operating expenses. That is the target. Sixty days of operating expenses is the low end. So that could be done for maybe
a year or two, but they would not want to stay down there permanently.
Chair Scharff asked what the logic was behind 60 days or 90 days or 120 days.
Mr. Keniston responded that it is general industry best practices.
Chair Scharff questioned what the logic was other than everyone else is doing it so that’s what we do.
Mr. Keniston explained if in an emergency, a disaster and payments could not be collected, processing systems went down, there would be funds in reserve to be able to pay our bills and
keep going.
Council Member Kou asked about clarification, jumping between 60 days, 90 days, 120 days, what was that?
Mr. Keniston reiterated the minimum is 60 and the top is 120 days and the target is 90.
Council Member Tanaka pointed out on Packet Page 92 what seemed odd is that the people who used the least amount of water got the biggest increase, a 4.5 percent increase. The people
who used the most water got a 3.3 percent increase. He questioned why was that, why wasn’t it the same?
Mr. Shikada stated that it was influenced by the meter charge increases, the fixed charge.
Council Member Tanaka suggested maybe there should be less of an increase for people who use less water and a greater increase for those who use more water.
Mr. Keniston recognized there was a problem and due to Proposition 218 the price of the water is based upon what the cost to serve it is. The fixed cost, the meter charges are related
to billing, customer service, etc., and they are a fixed cost for everyone. The first tier of water is very little distribution cost, primarily commodity charge and then tier two for
the larger users, really collects a lot more of the other distribution costs. So, the less water used, yes you don’t have to pay as much of the distribution charge, but with that fixed
charge in place, the meter, you are going to pay that even if you use no water.
Chair Scharff argued the opposite. He stated when he looked at this, 50 percent is basically fixed charges to everyone and 50 percent is volumetric, because that is the commodity price,
so everyone should pay the 50 percent. So, smaller water users are getting subsidized quite dramatically because they are not paying 50 percent of the fixed cost. This didn’t make sense
to everyone, so he explained if you go back to the chart there are a series of fixed charges in running a Water Utility and a series of volumetric charges. The commodity charge is what
we are charged by the FSPUC, 49 percent is the volume charge. That is what people get charged for water, so the more water used, that is what you get charged for. The capital costs and
the operation costs, theoretically you would have those charges if you didn’t deliver water. Those are the fixed charges. Normally the fixed charges are allocated amongst al the users.
So, he believed what was done here is people who used more water are actually getting more of the fixed charges to run the Utility than those using less water. So, they are, in effect
possibly being subsidized. We do a rate study to say that’s not true because we have to deal with Proposition 218. That’s why he was saying it’s not quite what they are saying.
Council Member Tanaka noted that on Page 92 it said if you use 4 centrum cubic feet (ccf) the rate increase is going up by 4.5 percent. If you use 25, which is almost six times that,
it only goes up by 3.3 percent.
Chair Scharff remarked if it was broken out according to this, the people that used 4 should have all of that rate increase, it should be the same as the people who used 25, and if you
used the 49 percent, that is separate, that is the volumetric charge. He understood that is what happened, but he felt they were actually being subsidized because they don’t have to
pay all the fixed cost. If people use less water, the share of fixed cost will continue to rise, so the less people use water the less we sell, the less people we have to spread the
fixed costs around, the more rates go up.
Council Member Tanaka believed it would make sense to spread the fixed costs across not each user but among how much they use.
Chair Scharff stated that’s mostly what we do.
Vice Mayor Filseth responded that we allocate the fixed cost across the variable cost.
Chair Scharff said we don’t do it 100 percent, but that is mostly what we do. The difference Council Member Tanaka is saying is for that small portion we do not do it.
Council Member Tanaka replied that was kind of weird, because it is not a small difference. It is about a 25 percent difference, so if you use less water your rate is going up about
25 to 30 percent more than if you use a lot of water.
Vice Mayor Filseth agreed is was totally weird and commented that was the reason you can use less water in the drought and the water bill actually goes up.
Council Member Tanaka noted there was also the drought surcharge, but if you think about ecology, the environment, you would want to incentivize people to use less water and the rates
for them should be less than the people who use a lot of water. He understood Proposition 218.
Vice Mayor Filseth believed if you wanted to incentivize people to use less water, then you could simply allocate the fixed costs evenly and everyone would pay the same, so all the variable
costs would be volumetric.
Mr. Keniston asked Vice Mayor Filseth to repeat that.
Vice Mayor Filseth started to repeat what he said, but then said it would work the other way. You would allocate the fixed costs volumetrically to multiply.
Chair Scharff noted you would then run into Proposition 218. He commented there was sort of the same dynamics in Gas and asked what saw done with Gas.
Mr. Keniston answered that Gas had a small fixed charge and a volumetric charge.
Vice Mayor Filseth asked if the majority of cost was fixed and infrastructure in gas, or is it actually commodity.
Mr. Keniston replied that gas costs are very low. He continued on with the slides which showed current versus prior years’ projections. Last year it was thought there would be a 6 percent
increase needed this year and this was lowered to 4. Reserves were relatively healthy. The changes in customer bills, about 3 to 4 percent for the majority was shown.
Council Member Kou asked if there was a rate increase in 2016.
Mr. Keniston answered yes.
Council Member Kou inquired what those were.
Mr. Keniston replied that in FY’16 there was an 11 percent increase.
Council Member Kou recalled that it was a certain amount at a certain month, and then it was increased later on in the year, so it was kind of spread out.
Mr. Keniston explained that it was split, a 4 percent in July then another 7 percent in September, so it was staged.
Council Member Kou questioned if it was the same thing for storm water.
Mr. Keniston asked if she meant storm drain or wastewater.
Council Member Kou could not remember exactly.
Mr. Keniston noted that storm drain comes up a bit differently than others. That raises by Consumer Price Index (CPI) annually.
Mr. Shikada explained there was a separate ballot measure to add additional funding for storm drain.
Chair Scharff felt Palo Alto rates were going up too fast, too quickly and they have been for too long, in the last few years and he could not support a 4 percent rate increase. He asked
Staff to figure out how to have lower rate increases. What really concerned him was the 7 percent rate increases shown in 2020 and 2021 and 2022. He liked just passing it through. He
didn’t want to tell them how do to it, he just wanted them to figure out how to cut their costs.
Vice Mayor Filseth remarked without subsidizing from reserves.
Chair Scharff stated yes, that was exactly right. What he wanted was Staff come back and show how they will come up with less rate increases. That maybe holding operating expenses lower
or figuring out we don’t need new meters, smart meters. He was not going to tell them how to run the Utility. He was just saying he thought the rate increases were too high and he could
not support them. He did not know how to approve the plan or the rate increase. He wanted them to come back, say they have looked at it and can have lower rate increases and what those
should be. He did not want to arbitrarily set a rate increase, possibly 2 percent rate increase, but did not feel that was smart.
Vice Mayor Filseth questioned if he was calling out the 4 percent this year or the 7 percent.
Chair Scharff replied they were asking for a plan, so he was calling out the plan. If the plan came back and said it was all 4 percent increases and you really believed it and that was
in the plan, he might be okay with it. If they said they were going to do 5 percent this year, but there were no rate increases later, or they could probably get by with 2 percent this
year, they would move to the volumetric rate increases, just pass those through and they will figure out how to keep costs lower. He just wanted a real plan to keep costs lower. He has
watched the rate increases be large continually on Water since about 2011. He was told it was all Hetch Hetchy charges, but it seemed too much.
Mr. Shikada indicated they could go back and take another look at the strategy going forward. He suspected it would be very difficult to do that for the upcoming Fiscal Year. They would
be better positioned to do it for 2020, 2021, to address those numbers. In either case, the primary strategy he believed would be heard from Staff is, if we had the ability to source
other than Hetch Hetchy, that could decrease the increase. There have been taste issues which has been one of the factors preventing them from looking at alternatives. The concern was
appreciated and he could take this back to the Department and evaluate what options could be brought back to Council for what are some tradeoffs in order to reduce the magnitude of the
rate increases. Some may relate to other revenue sources.
Chair Scharff stated he would like them to come back with other options.
Vice Mayor Filseth commented that he thought if they could figure out how to separate the fixed costs from the commodity costs, that would go a long way to being part of the solution,
because maybe we source somewhere else besides Hetch Hetchy. We would have a clear picture of that. The fixed cost is what it is and here are the options, and here are your options on
the volumetric costs and not jumble them together. The volumetric cost you would only have one choice, to switch commodity suppliers. You could get to the next mayor who says he wants
4.25 percent, but you cannot get there from here unless you switch commodity suppliers. That is the kind of thing you would like to know.
Mr. Shikada suggested they talk about timing and what options they have at this point in the budget cycle. They will take the feedback.
Chair Scharff asked them to come back with options. It seems easier than the Committee trying to make something up that may not be realistic. The other message he wanted to send, he
would like to send to the UAC is that he believed the UAC is focused enough on cost containment and he wanted that message to go back and let them know that Finance is very concerned
about cost containment and could they please pay more attention to that.
Council Member Tanaka inquired on Packet Page 91 he noticed the service charge is going up 11.6 percent and he wondered why that was going up so much compared to everything else.
Mr. Keniston answered that is the distribution percentage cost increase. That is the increase for the distribution side, so the commodity was actually decreased and that nets out to
a 4 percent overall rate increase.
Council Member Tanaka asked why not make this 4 percent, why 11.6 percent.
Mr. Keniston explained they were trying to capture the costs related to the distribution, properly apportioning what is supply-to-supply and distribution-to-distribution.
Council Member Tanaka questioned if it was really going up 11.6 percent.
Mr. Keniston stated that in the long run it is to get them up to what those costs are ending up. They are currently too low, so they are being brought up to get them on track.
Council Member Tanaka inquired why it is going up evenly across different sizes. You would think that the bigger the meter, the more expensive it is to maintain. And if you do it by
volume it is more. He did not understand why it was an even spread.
Mr. Keniston explained that some costs do not necessarily go up by size of meter, such as billing.
Council Member Tanaka commented it did not seem very precise to him. If you are talking about 5 1/8 versus 12 inches, these are massively different, so it made no sense to him to go
evenly.
Mr. Keniston indicated it was how the costs allocate for those components.
Mr. Abendschein explained there is a cost allocation model that they use based on American Water Works Association (AWWA) industry standard methodology. Staff would have to dig into
it a little bit further to explain why it is going up evenly across all of them. He noted the cost does go up quadratically based on the AWWA methodology.
Chair Scharff asked if Staff felt they had enough direction.
Mr. Keniston said yes.
NO ACTION TAKEN
3. Utilities Advisory Commission Recommend That the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2019 Wastewater Collection Financial Plan; and (2) a Resolution Increasing
Wastewater Rates by 11 Percent by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater
Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger).
Eric Keniston, Senior Resource Manager informed the Finance Committee (Committee) they are recommending an 11 percent rate increase for Fiscal Year ’19. It is a small utility and a double-digit
rate increase but for residential customers it is about $3.80 per month rate increase. Most of the costs seen here increasing over time are due to changes in increases seen at the treatment
plant, operations and capital costs there. He noted the treatment plant was built between the 1960’s and 1970’s. It is all aging infrastructure that at this point in time needs to be
replaced. There are several major projects slated and they will be bond financing quite a bit of it. The cost of those projects will be shared amongst the various partner agencies, Palo
Alto being one. We use about 33 percent of the plant capacity. Mountain View is another major user. All these costs will increase as these projects go on.
Vice Mayor Filseth asked why treatment operations zero in 2015.
Mr. Keniston replied that was an excellent question.
Vice Mayor Filseth noted it looked like there were two 2015’s.
Mr. Keniston stated yes, he was right. There was an error on the graph and the first 2015 should be ignored and the second 2015 should be looked at. He noted that over the course of
the years the vast majority, about 66 percent, of the increases were coming from capital. The rest was evenly split amongst operations and collection system capital improvement. Here
there were not the level of reserves as seen in the Water. There were very little rate stabilization reserves going into FY’17, so any cost increases will have to be borne out and supported
by the operations reserves. The 11 percent rate increase amounts to a $3.80 change on a residential bill. Average cities right now run about $2.00 a month, so we are significantly lower
than a lot of the other utilizes around.
Council Member Tanaka asked which one had their own Sewer Utility.
Mr. Keniston replied that almost all the agencies had their own Wastewater Utility.
Council Member Tanaka inquired if Menlo Park did, Redwood City, Mountain View, Los Altos. He thought we shared.
Mr. Keniston explained that everyone had their own collection systems, but they usually funnel to a larger treatment plant, so here the treatment plant takes Palo Alto, Mountain View,
East Palo Alto. For Menlo Park, Redwood City they go to a central treatment facility over by the Baylands.
Council Member Tanaka was trying to understand for the comparisons, is there an even comparison, because it was not fair to compare one city that has their own treatment plant against
a City that used someone else’s.
Mr. Keniston replied that probably of the agencies here, the treatment plants are usually, because they are so large and cost intensive, they are usually shared by multiple agencies.
Sunnyvale has a treatment plant and he thought they used it alone. Here the treatment plant operates under the Public Works and it is shared amongst about five agencies. That is similar
to how it would be seen in all the agencies. So, this was more of an apples-to-apples comparison. It is a combination of the collection system, internal costs to get everything to that
treatment plant, and then what the treatment plant charges them to treat.
Council Member Tanaka remarked just to be clear, Palo Alto does this for Mountain View and Los Altos. Redwood City, Menlo Park, Santa Clara and Hayward use something else.
Mr. Shikada advised that Santa Clara shares with San Jose.
Mr. Keniston thought Hayward, East Bay.
Council Member Kou asked if we had East Palo Alto too.
Mr. Keniston replied yes.
Council Member Tanaka commented that to do this comparison it might be good to have all the cities, East Palo Alto, Mountain View, Los Altos. He asked if there was anyone else we do
this for.
Mr. Keniston answered Stanford.
Council Member Tanaka suggested that to get a really good comparison it would be everyone who uses the same treatment plant, what are their costs. If Hayward and Santa Clara are on totally
different systems, it is not an apples-to-apples comparison.
Mr. Keniston responded that all the agencies were all being charged a treatment cost from a central plant somewhere. The individual plants might be charging different costs to their
customers. He did say the treatment plants all around the Bay were all built roughly about the same time, back in the 60’s and 70’s, and they are all seeing the same issues of aging
and needing to be rehabilitated.
Council Member Tanaka asked what Stanford and East Palo Alto rates were.
Mr. Keniston replied he did not know off the top of his head.
Council Member Tanaka inquired if they were higher or lower than ours.
Mr. Keniston responded he did not know.
Chair Scharff noted on the operations treatment it was really hard to look at the graph and see, but it looked like it had been pretty stable from 2013 to now in terms of costs.
Mr. Keniston replied yes.
Chair Scharff stated that it then seemed to ramp up, just the treatment operations number. The reason he understood the 11, 12 and 10 is that there were about to be major upgrades to
the water treatment plant and that was the 30 percent increase to pay for that for the most part. He asked what collection system meant.
Mr. Keniston explained that the collection system is basically what comes from your house and gets out to the plant.
Chair Scharff noted that was the capital for that.
Mr. Keniston replied that the orange and the green on the bar chart represented what it takes to get it from the house out to the head works at the treatment plant, and then the blue
was everything that happens there.
Chair Scharff believed the really helpful numbers would be things like from 2013 to 2017 operations. We are not expecting them to go up for these reasons. He questioned why operations
would go up in wastewater treatment. It looked like those numbers got pretty big as they went on. He stated obviously the upgrades should be done and the rate increases were really just
for three years. He averaged out through 2018, which was a little bit over 4 percent increase.
Mr. Keniston replied about 4.5, yes.
Chair Scharff asked if you take out the capital improvements, were there higher than historical increases. It did not look like it.
Mr. Keniston noted for the collection, the capital, the internal operations, capital and collection operations it was going up by roughly 3 to 3.5 percent per year is what was used for
the projections. The treatment capital expense is primarily debt.
Chair Scharff questioned that it is so expense to redo the water treatment plant and it has a useful life of x amount of years, and was that why it is spread out.
Mr. Keniston replied that it would be debt financed over several years.
Chair Scharff asked why there were the 11, 12 and 10 rate increases if it could be financed over whatever the useful life of the plant is and that way future fate payers would be paying
their fair share of the increase.
Mr. Keniston explained that the 11 percent is a double-digit rate increase, but the overall amount of money is not that much. From 10 to 11 percent is only about an additional $150,000.
So that additional amount is for the capital expense. They will be trying to resume the process of doing annual main replacement projects on the collection side and the 10, 12 and 10
gets them back up to where they are collecting at that.
Chair Scharff understood that none of the big rate increases have to do with the money that will be spent to upgrade the wastewater treatment plant, other than the debt service. The
whole thing would be financed but other capital improvement would be resumed and that is why the large increases were needed.
Jon Abendschein, Assistant Utilities Director commented that most of it was related to treatment debt and treatment operations. He noted on Slide 4 treatment was not broken down by capital
and operating, but if it had been, debt was a pretty significant portion of that. Financing does not save you from rate increases because you start paying the debt service pretty much
immediately. What it saves you from is having to collect all of it in one year, which would be 40, 50 or 60 percent rate increases if it was not financed.
Chair Scharff was wondering what percentages of those increases were operations going out because operations have been pretty flat. He asked why the cost of operating the utility was
going up. As Council Member Tanaka said, if we fixed the wastewater treatment plant, made it more modern and efficient, we should save money.
Mr. Abendschein replied that there was not a representative from the plant present, but this has been talked about in past meetings. The Utilities Advisory Commission (UAC) has asked
this question. Some of it has to do with compliance costs, that we have stricter outflow requirements continually increasing so costs for things like chemicals or other sort of operational
costs do go up. Also, in the short term there are increased operations costs and capital replacement costs. The payoff from the capital improvements won’t be seen for a number of years.
Council Member Tanaka noted this was a little more complex than the other one. There is the collection and the treatment. The treatment and collection are our own, so any treatment expense
or capital is split among all the different cities.
Mr. Abendschein replied correct.
Mr. Keniston clarified that what was represented was only Palo Alto’s share.
Council Member Tanaka asked if we have control of it or do other cities control it. Can we just unilaterally decide to spend $10 million on treatment and other agencies just have to
hand over the money.
Mr. Keniston stated there has to be an agreement first. The Capital Improvement Program (CIP) projects are drafted and then that goes to a group that votes that this is what they would
want to do. Each individual City Council can come back and say yes.
Council Member Tanaka asked how it worked. What if Palo Alto decided to do a lot of capital improvements, but no other cities want to do them.
Mr. Shikada responded that’s what recently happened in seeking financing, Palo Alto Public Works Staff went to the other agencies and solicited their approval. In that particular instance
the East Palo Alto Sanitation District initially had some concerns that were ultimately worked out. That was the process.
Council Member Tanaka inquired if they did not get approval.
Mr. Shikada stated the projects would not be able to be done.
Council Member Tanaka clarified that everyone has to agree, or it does not happen.
Mr. Shikada responded that the City of Palo Alto is the administer for the plant, so he thought there was a dollar threshold in certain circumstances of projects that Palo Alto can proceed
with, otherwise it does require specific approval by the partners.
Mr. Keniston stated there was an annual approved capital amount that they are allowed, but there were additional projects.
Council Member Tanaka asked if Palo Alto also passes along the unfunded pension liabilities to our partner cities.
Mr. Shikada replied that ultimately it factors into the operating expenses.
Kiely Nose, Office of Management and Budget Director clarified that the pension liabilities are accounted for in each individual fund. When looking at a fund that has partner agencies
like the wastewater treatment plant, when the annual allocation for the treatment plant is calculated for each of the partners, the annual pension costs are included in that. She remarked
that the unfunded liability is not included in those numbers; however, to the extent the City chose to do things like add funding to the 115 Trust Fund, that cost would be passed to
each partner agency.
Council Member Tanaka suggested that should be done.
Ms. Nose noted they have been doing that. When the talk about allocating all the additional funding for contributions to the 115 Trust, each non-general fund fund is also apportioned
their fair share. So, as the allocations are made, the allocations are made across all funds and that is getting baked into the calculations for each of the partners. This has been done
on a one-time basis, but they have been working on figuring out what the on-going policy would be, when that would be something that would be factored into the financials of all the
operations, not just the treatment plant partners, but it will get factored into all of these rate forecasts as well.
Council Member Tanaka understood that on the treatment side we don’t have that much control of the capital expenses for the treatment because we have to get the buy-in or approval from
the partner cities at least at a certain dollar mark, so the only thing we could control would be the collection capital.
Mr. Shikada answered correct.
Council Member Tanaka asked if they had a comparison of how much collection capital we are spending versus other cities.
Mr. Keniston replied they do not have that.
Council Member Tanaka noted that would be a great comparison, especially for the ones in the same treatment plant area.
Mr. Shikada agreed that would be an interesting benchmark, but it would actually take a little bit of time to put together. On an on-going basis that is the kind of metric they would
want to try. Again, sewer main replacement was the term typically used, so periodically the Council or at least once a year, the Council would see a contract come forward for construction
of main replacement projects throughout the various parts of the City. There are similar projects and programs that other agencies would pursue as well.
Vice Mayor Filseth stated if you project out the treatment operations costs from 2017 to 2028, 11 years, it looked to him like it grew 4.7 percent a year and this seemed a little high.
He asked why that was.
Chair Scharff shared that on the Packet Page it said that treatment operation costs had stayed relatively flat during the time frame up to that. He rephrased the question, it has been
really flat and suddenly you want a 4.7 percent increase going into the future. Why?
Mr. Keniston replied that the treatment operations costs in the past did bump up because of additional chemical needs during the drought. Going forward he admitted he was not as familiar
on the operations side as to the nature of increases. He had been focusing on the capital side of the operations and the changes there. He could go back and get more information.
Mr. Shikada noted they would have to get that information from Public Works. He thought the 4.7 percent is an historic trend that they have been extrapolating out.
Vice Mayor Filseth said that was his calculation. The Chair’s comment was actually if you looked from there to there it is dead flat.
Chair Scharff reiterated that was what it said in the Staff Report.
Mr. Shikada acknowledged they would have to verify that. They did not have that information in a tabular form.
Mr. Abendschein agreed they should be bringing the Committee that information or a representative. He reported there were some one-time cost changes related to how reserves were accounted
for in the treatment plant. That information was somewhere in there so depending where you started counting from, it may be artificially low. Some of that also may be related to budget
versus actual spending in the treatment plant when you shift from looking back at actuals to looking at budget, it sometimes appears there is a jump. They try to mitigate that as much
as possible by putting in an allowance for unspent budget in the projections. He did not know for sure if the treatment plant was doing that.
Vice Mayor Filseth asked if that was the case on this chart. So, prior to today they were looking at actuals and going forward they were looking at budgets.
Council Member Kou asked if they were going to start putting the pensions and salaries in, would they need a bar on the graph to show that was part of what was being considered.
Mr. Shikada replied that currently it was a part of operations.
Council Member Kou wondered if it was advisable or recommended to draw it out to show it is pension versus just including it in operations.
Mr. Keniston remarked they could work on that chart. It was not something they had currently. This model is running by fund, but they could work on breaking it out to that level of detail.
Council Member Kou asked Kiely about this.
Ms. Nose agreed that she would work with Mr. Keniston and the team on how they would do that. She commented that when dollar magnitude was talked about, it is much smaller that would
be thought in comparison to the commodity costs or capital costs. She wondered if it was worth it on a graph this large. If the Committee wanted it broken down into all the pieces in
one category such as Operations, and look at trends in that smaller category, it might be worthwhile. When looking at dollar values, only Pension Trust Fund, that would be a percentage
on a percentage on a percentage.
Council Member Kou responded that it does come up and people ask about it and when it is in there then people wonder why. Did they want to take the time to break it down to search minute
details.
Vice Mayor Filseth noted for the purpose of this, what they would like to see is the component of the Unfunded Actuarial Liability (UAL) amortization payment, not necessarily the normal
cost.
Ms. Nose replied it is a combination of both.
Vice Mayor Filseth commented that the one that was growing fast was the amortization payment.
Ms. Nose stated the one that was growing at a more rapid pace is, yes, the amortization payment. The normal cost was a smaller year-over-year change based on the California Public Employees’
Retirement System (CalPERS) reports.
Vice Mayor Filseth agreed the one to worry about was the amortization payment.
Ms. Nose recognized this Committee was extraordinarily well versed on the unfunded liability for pensions. In terms of how the year-over-year increases were looked at on the General
Fund side and talk about the growing contributions made by the City based both on the CalPERS as well as our own organizational actions to proactively address this issue, those exact
same trends would be seen as each of these funds was looked at. She confirmed when the organization talked about pension and the growing costs on the General Fund side, whatever they
did do on the General Fund side to be proactive, they also are emulating that across all funds. They really focus on General Funds but as an organization they would carry it through
all funds.
Chair Scharff clarified that what was asked for was to approve an 11 percent rate increase, the Rate Stabilization Fund would be done away with and everything was being moved into the
Operations Reserve.
Mr. Keniston noted there has been a long-running plan to use the Rate Stabilization Reserve out.
Chair Scharff articulated that the Resolution was to approve the Financial Plan and then to get rid of the Rate Stabilization Reserve and move everything into the Operations Reserve.
Mr. Keniston responded that they would be using all the funds from the Rate Stabilization Reserve. He added that on the treatment operations costs, they did factor in additional expenses
for water and air permitting fees for the Bay Area Air Quality Management District as well as increased costs related to chemical expenses. That did account for some of the jump seen.
Chair Scharff noted he was fine with the 11 percent, fine with getting rid of the Rate Stabilization Reserve, although he felt this should have been called out in the recommendation.
Mr. Keniston replied that they are not getting rid of it, just taking funds from it. It would still remain there, just get being used.
Chair Scharff asked then why this completely goes away on the chart.
Mr. Keniston clarified it goes to zero.
Council Member Kou questioned if they found it was not necessary to have the Rate Stabilization Reserve down the line.
Mr. Keniston noted they were satisfying what was needed by using the Operations Reserve.
Mr. Abendschein remarked it was being used for its intended purpose. It was meant to phase in rate increases and that was what it was used for, otherwise there would have been steeper
rate increases in earlier years.
Chair Scharff asked why it was not gotten rid of, just going to zero forever.
Mr. Keniston commented there could be a situation in the future that they might want to have something in Rate Stabilization if they chose to move money in there to mitigate against
possible future large increases, there was a potential out there for it.
Chair Scharff noted the Committee was also being asked to approve the Plan. He had an issue with the future graph of financial projections, Packet Page 153. It looked like operations
had been flat and now projecting a 4.7 percent increase and he didn’t want to give the impression that was okay without understanding it. He did not know if it had an impact. He asked
if the 11 percent was just for 2019.
Mr. Keniston clarified that really what they would be approving was the 2019, the Plan for the 11 percent, and basically transferring the remaining Rate Stabilization Reserves to the
Operations Reserves.
Chair Scharff replied that was what he figured so he was inclined to approve the Wastewater Collection Plan with the notion that Staff will return and take the advice not to just assume
it is going to be a 5 percent increase and try to hold it down.
Council Member Kou asked if Chair Scharff meant that in 2020 they come back for whatever increase they looked for then, and the 11 percent increase is just for 2019.
Mr. Keniston indicated that all they were asking for tonight was just the recommendation for FY’19. Every year they would come back and ask for any additional changes.
Vice Mayor Filseth confirmed that the dewatering facility was being built, getting rid of the incinerators, costs would be expected to be a little higher.
Mr. Shikada replied yes and added that the discussion from the Committee would cause him to take another look at how the out-year projections were done in that there was some question
as to whether that was valid.
Vice Mayor Filseth remarked that this Committee was the long-range financial forecast which also projected on the General Fund expenses falling 2 percent a year in the out years.
Mr. Keniston noted that for the out years, they generally use the long-range financial plan as the growth metric.
Council Member Tanaka questioned on Slide 9, on residential we were in the range of our partner cities, but on the commercial we were already higher and wondered why that was.
Mr. Keniston responded that was just the nature of our commercial mix relative to other cities so there would be a difference in every jurisdiction; how many commercial customers you
have versus them that affects your cost study. Other factors such as restaurants have grease discharges, prevalence of grease traps. There would always be variances between different
cities and how their costs break out.
Council Member Tanaka stated we were the highest. On the slide for residential we were lower than Mountain View and Los Altos, so the increase is probably not that big a deal. On the
commercial side we are already way higher than Mountain View and Los Altos.
Mr. Keniston replied he had not dug into the studies for Mountain View and Los Altos to understand their individual dynamics. They pulled a general comparison using a general rate. When
you get into wastewater commercial comparisons, those are also a little tricky. Other jurisdictions may break rates out differently and detailed.
Council Member Tanaka reiterated that he wished they had East Palo Alto and Stanford to compare to.
Mr. Abendschein noted they are updating the cost allocation study for wastewater, so they can get more detail. A lot often has to do with the composition of the commercial population
in each city.
Council Member Tanaka thought we were between Mountain View and Los Altos and we should be in between, but we are higher than both.
Mr. Keniston commented if they had more commercial a larger percentage of their water outflows and how it breaks out for their cost averaging.
Vice Mayor Filseth stated he meant that these are the numbers, but they do not mean anything.
Mr. Keniston remarked he would have to look into each of the other cities’ individual cost of service analyses to see why they are charging what they are for their services.
Council Member Tanaka reiterated that it would be nice to have East Palo Alto and Stanford on there. The residential rate increase looked like we would not be totally out of market,
but we are way out of market already, for the people who use the same treatment plan. You couldn’t compare other cities like Hayward to us. For the partners who all used the same treatment
plant, we were the highest.
Mr. Abendschein agreed he was right for the specific bill comparison and most likely in general as well.
Council Member Tanaka suggested it would make sense to have an even rate increase, maybe residential should go up and commercial should go down more.
Chair Scharff noted for the most part they try to have the commercial subsidize the residential to the extent allowed under Proposition 218.
Council Member Tanaka believed what he heard was we have no control over this, it is all 218 and we have to allocate the cost the way it is. If that were true, and he supposed all cities
have 218, then the residential and commercial should reflect each other. How can we stick it to the commercial when we have 218. How is that possible.
Mr. Abendschein replied we do not. Costs are allocated according to industry best practices. Rate consultants are hired to do that work. It has been a while since the cost-of-service
study was done for wastewater. That will be updated this year and there may be shifts in allocations based on that. It is not impossible that residential would go up and commercial go
down.
Council Member Tanaka noted they are the same. On the data point on one slide it seemed like it was out of whack.
Mr. Shikada commented that his conclusion from this slide is that the rates are all over the map among all the different agencies, so as they get into the cost allocation study they
would take another look at it. It really varies significantly. In terms of commercial, it is really the nature of commercial and the extent to which, for example, restaurants may use
a lot of water versus industrial, depending on the nature of industrial would not. The mix that is represented within each one of these communities, really made a big difference in terms
of volume and nature of wastewater flow.
Council Member Tanaka acknowledged that, but noted that we could say Palo Alto is super unique, so we can never compare ourselves to see what is efficient or not because we are so unique.
He felt that Palo Alto should try to benchmark itself. As pointed out by the Chair and Vice Mayor Filseth, the operations expenses are going out of control so why is that. He believed,
where possible, Palo Alto should try to benchmark itself and have some metrics. There is Palo Alto, Mountain View, Los Altos, East Palo Alto and Stanford using the same exact treatment
plant, so we should know clearly what the cost is among the partner cities compared to our own for both residential and commercial and if we are out of whack we should know that. If
we do not have the ability to shift all this around, then something is wrong. It could be the table is incomplete, maybe Stanford and East Palo Alto are just way higher, and Palo Alto
is right in the middle, on the commercial side, because we do not have the data.
Mr. Shikada replied that they do not have Staff that are assigned to collect the data on an ongoing basis and do comparisons, so it would be a struggle to keep up with the data collection
desired. They will do more in this area and will continue to look for opportunities to do so.
Vice Mayor Filseth moved the Staff recommendation on Wastewater that the resolution is adopted approving the Fiscal Year 2019 Wastewater Collection Financial Plan and also adopt a resolution
increasing Wastewater Rates by amending Rate Schedules S-1, S-2, S-6 and S-7 as in all the attachments listed in the Staff Report.
Chair Scharff seconded the Motion.
MOTION: Vice Mayor Filseth moved, seconded by Chair Scharff to recommend to the City Council:
Adopt a Resolution approving the Fiscal Year 2019 Wastewater Collection Financial Plan; and
Adopt a Resolution increasing Wastewater Rates by amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6
(Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal - Industrial Discharger).
Council Member Tanaka indicated he was going to make an Amendment. He agreed that having three double-digit rate increases year after year didn’t seem right. The biggest issue he had
was that the residential/commercial split just did not seem right. He requested to make a friendly amendment that Staff reexamine this to see if that is correct.
AMENDMENT: Council Member Tanaka moved, seconded by Council Member XX to direct Staff to review the residential/commercial split.
AMENDMENT FAILED DUE TO THE LACK OF A SECOND
Vice Mayor Filseth asked Staff if they need that as part of the Motion or did they feel they were given adequate direction by the Committee.
Mr. Shikada indicated they would try to pull together additional information.
Council Member Tanaka asked if this Motion locked in the increase between the two.
Mr. Shikada believed it would allow them to proceed while also checking on the benchmarking.
Vice Mayor Filseth commented that if they check on their benchmarking and found they should increase residential 12 percent and commercial only 9 percent or something like that, what
would happen then.
Mr. Shikada hazarded a conclusion that the benchmarking would not change that recommendation for this year.
Chair Scharff suggested that included in the Motion when Staff comes back next year that they include East Palo Alto and Stanford for the benchmarking.
Council Member Tanaka stated it seemed like something was wrong right now, and there is a double-digit increase next year which did not seem to make sense.
Chair Scharff noted they would have to come back next year and ask for that.
Council Member Tanaka reiterated his main issue was that it did not seem right.
Mr. Abendschein suggested that a rate study was needed to support any sort of allocation changes. Making allocation changes without a rate study could invite lawsuits. It is in the work
plan for next year to do that actual study.
Council Member Tanaka inquired if they did a rate study this year.
Chair Scharff noted they are really expensive, in the past they inquired about policy and it is a big process.
Mr. Shikada added it included design guidelines that lead to the analysis.
Council Member Tanaka inquired if this went to Council and directly perhaps on Consent.
Chair Scharff answered it does not go on Consent.
Mr. Keniston commented that Water and Wastewater both require a public hearing. The notices would have to be sent out by May 4th to notice any Water or Wastewater or Refuse, and in this
case, we do not have any Refuse rate increases. This would have to be sent out to every one of the residents in the City and business. They would have to give 46 days’ notice. At the
City Council meeting the public hearing would be opened, the protest of 50 percent plus one. It cannot be a Consent item. It has to be voted upon and heard at that meeting.
Mr. Shikada was reminded by Mr. Keniston’s remarks that with the notices on the water, since they are coming back with that, he did not believe they would be back here before those notices
need to be mailed out in time for the budget.
Chair Scharff suggested they finish wastewater then go back to water.
Council Member Tanaka reiterated his main question was if they could put in what East Palo Alto and Stanford were by the Council Meeting.
Mr. Keniston answered yes, they could by the Council Meeting.
Council Member Tanaka responded then at the Council Meeting they could see that maybe Stanford and East Palo Alto are way higher, and this makes sense.
Vice Mayor Filseth noted Council Member Tanaka got a yes.
AMENDMENT: Council Member Tanaka moved, seconded by Council Member XX to direct Staff to reexamine the twelve percent increase for the next Fiscal Year.
Council Member Tanaka said the second thing he had was that he disagreed with having the 12 percent next year. He realized that would come up again and be voted on, but that part of
the plan was extreme, and he could not agree with it. He made an amendment that the 12 percent should be something like zero or 5 percent because to go 11, 12, 10 three years in a row
is really high, faster than inflation. He noted the Staff here could not understand what was driving up the operations cost. To not have a handle on why the treatment operations is going
out of control and just plan for three years of double-digit rate increases is inappropriate. His amendment was to take out 2020’s 12 percent rate increase.
AMENDMENT RESTATED: Council Member Tanaka moved, seconded by Council Member XX to remove Fiscal Year 2020 twelve percent rate increase.
Vice Mayor Filseth did not accept that as a friendly Amendment. If there was a second, they could vote on it.
Council Member Kou asked if he could just say reduce.
Council Member Tanaka agreed with reduce.
Vice Mayor Filseth suggested that was one they should vote on.
AMENDMENT RESTATED: Council Member Tanaka moved, seconded by Council Member Kou to reduce the Fiscal Year 2020 twelve percent rate increase.
Vice Mayor Filseth asked if Council Member Tanaka cared to speak to his Motion.
Council Member Tanaka replied yes. This was three double-digit rate increases in a row, that is higher than ever done, higher than the average, it is higher than inflation or Consumer
Price Index (CPI) and at the same time there is not handle on what is driving the operational costs, so it did not make sense to him that the Committee was blindly approving massive
rate increases without knowing why expenses were going up so much.
Chair Scharff said he was sympathetic to what Council Member Tanaka was saying, but he did not view this as approving the second rate increase. He could support a compromise on this
like approve the plan, but when Staff comes back next year, have the answers to why is it increasing so much on the operations side and come back with a better justification. He was
willing to put in the motion the Committee was not giving tacit approval to any further rate increases.
Council Member Tanaka responded if that was done he would support it, 11 percent and no increases.
Chair Scharff clarified this Committee was not saying no increases but that this Committee at this time needed more information to understand the further rate increases.
Mr. Shikada suggested on behalf of Staff, maybe a slight wording change that it was no later than next year’s budget they would bring back information and options for reducing the increase
in 2020.
Council Member Tanaka preferred what was said earlier, no passive increase because if it is approved the way it is stated right now, Committee is approving double-digit increases for
three years in a row.
Vice Mayor Filseth proposed there were some words that said Committee was approving this one and the remainder is subject to approval next year on the rate increases.
Council Member Tanaka noted that was fine with him.
AMENDMENT WITHRAWN BY THE MAKER
Chair Scharff commented that would be added in.
INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE MAKER AND THE SECONDER to approve the Fiscal Year 2019 11 percent rate increase and have the rate increases for the following years
be subject to approval for next year.
MOTION AS AMENDED RESTATED: Council Member Filseth moved, seconded by Council Member Scharff to recommend to the City Council:
Adopt a Resolution approving the Fiscal Year 2019 Wastewater Collection Financial Plan;
Adopt a Resolution increasing Wastewater Rates by amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6
(Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal - Industrial Discharger); and
To approve the Fiscal Year 2019 eleven percent rate increase and have the rate increases for the following years be subject for approval next year.
MOTION AS AMENDED PASSED: 4-0
Vice Mayor Filseth stated he agreed with the Chair in terms of not knowing if 5 percent a year increases for Treatment Operations is right or wrong, so he was not prepared to sit here
and say it should be 3 percent. As for the capital expenses, he understood the argument that the incinerators were being decommissioned, investing in capital, replacement makes sense.
He could not say what number is correct.
Council Member Tanaka noted 11 percent was just passed, but asked if all the other cities also had to do 11 percent, did Staff have to go to all the other cities and ask for something
equivalent for treatment operations.
Chair Scharff replied we just charge them.
Mr. Abendschein noted these costs are coming, to the extent they have been approved, they are for every single other agency as well, so it is like a San Francisco Public Utilities Commission
increase in costs.
Council Member Tanaka inquired about the 10 percent, would that be passed on to them, they would have no choice.
Mr. Shikada stated it was not automatic. He did not recall the mechanics of how that was done, but there is a consultation.
Vice Mayor Filseth asked if he was saying there was some kind of checks and balances.
Council Member Tanaka noted there was something like a 20 percent increase from 2017 through 2018 on the Treatment Operations and that means all the other agencies would have that 20
percent in 2018 as well. Won’t they be upset by that or is it just too bad.
Kiely Nose, Office of Management and Budget Director agreed with Staff that Public Works should come here to elaborate on this. We have contractual agreements with every agency that
uses the treatment plant, and we abide by those contractual obligations with them in terms of how the costs are calculated and allocated to them. It is an Enterprise Fund, so it is intended
to be 100 percent cost recovery, meaning all the users of the service are paying their fair share. There is not a subsidy from the General Fund or allocation of all the City’s costs
for the treatment plant to all the users. This is all done by contract with the users, and regarding the additional capital improvements done at the treatment plant, given the magnitude
of the investments made started in 2017, 2018 and moving forward, they have reached out to their partners to go through their financial forecasts and show them the project plans, so
they can see what is happening.
Mr. Abendschein advised that there are regular quarterly meetings with the partners where they will see the projected cost increases.
Council Member Tanaka replied if he was on the Mountain View City Council or Los Altos City Council and he saw that from 2017 to 2018 there is a 20 percent bump in the treatment costs,
he would question that. He just wanted to know if Palo Alto had that power.
Mr. Abendschein replied they would have to get back to the Committee about the mechanics of what is approvable and what is not approvable and Public Works would have to be involved.
Council Member Tanaka reiterated that if he was them and looked at the rate increase he would feel 20 percent is a massive increase and would ask why.
Ms. Nose cautioned when talking about a multi-year, multi-million-dollar capital improvement that requires debt or loans, there is the potential for, as the case here, that you actually
are still investing in capital while the debt service has to start to be paid. So, if you are doing a five-year Capital Plan, you are going to start issuing debt year one.
Council Member Tanaka clarified that he was talking about the operations expense.
Ms. Nose explained that a debt expense is an operating expense, so that was something to remember.
Council Member Tanaka responded that in the chart it has the treatment debt.
Ms. Nose recognized that. One of the operating costs is actually debt service. So, once you issue the debt and spend the money on the capital infrastructure you have to repay that debt,
and that actual repayment is an operating cost. You will see that cost show up on the operating side, whereas the capital investment is on the capital side. She explained that this dual
timing will be seen for a period of time and ultimately what will happen is, once the plan is completed, the spike in the capital costs will drop, but the operating costs will continue,
and depending on the debt repayment schedule, they may grow at a certain rate, if it is variable, if it is fixed.
Council Member Tanaka tried to explain what the Chair and Vice Mayor Filseth were concerned about.
Mr. Shikada asked if there was a vote.
Chair Scharff replied there no vote, just direction and Staff said there was enough direction to come back on the Water.
Mr. Shikada stated he was referring to wastewater. There was a vote on wastewater but wanted to come back on water.
Future Meetings and Agendas
Chair Scharff reminded Mr. Shikada he wanted to talk briefly about water.
Ed Shikada, Assistant City Manager and Utilities General Manager remarked only to note that as was previously discussed, they will be back the next meeting in May.
Kiely Nose, Office of Management and Budget Director informed them the next meeting the Finance Committee had will be on April 17, which would not be a quick enough turnaround for Staff
to change the rate.
Chair Scharff stated they will get together with Ms. Nose. Some scheduling dates were needed because the issue was also the chamber improvements and now water. Some dates would be worked
out to figure that out.
Ms. Nose cautioned that the water rate has to be posted by May 4.
Chair Scharff stated they would figure out a date that works.
Michelle Flaherty, Deputy City Manager reported there is a full agenda for the April 17 meeting.
Chair Scharff remarked this would have to be talked about and figured out. If everyone wants to take this up on the April 17 meeting and instead of ending at 8:30 the meeting ended at
9:30 people may or may not want to do that. He felt it was much better to look at the agenda, figure out the timing and do that.
Mr. Shikada asked if the Water Financial Plan could be considered laid over to the next meeting and continued at that point.
Chair Scharff that could be done.
Vice Mayor Filseth asked if they were going to talk about future meetings. He inquired about the April 17 meeting shown as to be reschedule.
Chair Scharff stated it is not being rescheduled.
Council Member Tanaka remarked that all the budget hearings are during regular work hours, so he wondered if some of these could be moved later. Half of the Committee would be lost if
these are during work hours. He asked if it would be possible to have some comprise and have some of these during non-work hours.
Chair Scharff stated this was not possible. This has been talked about for months, so it needs to be done during work hours.
Council Member Kou inquired if this was because Staff is here.
Chair Scharff reiterated that Staff is here, there would be too many night meetings, it would take too long, and it did not make sense from Staff perspective. He realized it was work
hours, but it is work hours also on budget. Almost every city did their budgets during the day. It is a long process.
ADJOURNMENT: Meeting was adjourned at 8:33 P.M.
FINAL SENSE MINUTES
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Special Finance Committee Meeting
Final Sense Minutes: 04/03/2018
FINANCE COMMITTEE
FINAL SENSE MINUTES
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