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HomeMy WebLinkAboutStaff Report 2511 City of Palo Alto (ID # 2511) Finance Committee Staff Report Report Type: Meeting Date: 3/6/2012 City of Palo Alto Page 1 Summary Title: Wastewater Collection Fund Financial Projection Title: Wastewater Collection Fund Financial Projections (FY 2013 - FY 2017) From: City Manager Lead Department: Utilities Recommendation This report discusses the projected costs and revenue requirements for the Wastewater Collection Fund for Fiscal Year (FY) 2013 through FY 2017. No action is required. Executive Summary Staff assessed major cost drivers and expected costs, the short-term assessment of risks and reserve guidelines, in order to determine the revenue requirements for the Wastewater Collection Fund for the next five years. The financial forecast shows that an overall annual rate adjustment of 5% is needed for FY 2013 followed by increases of 9%, 9%, 6% and 3% for the following four years. These preliminary projected rate adjustments achieve the goals of ensuring that the fund’s reserve balances are adequate and within the Council-approved reserve guideline levels for the long-term forecast horizon. In April, the Finance Committee is scheduled to consider a Wastewater Collection rate adjustment proposal for FY 2013. Background In order to maintain the financial viability of the Wastewater Collection Fund, staff conducts an annual review of major cost drivers and expected costs facing the utility; evaluates risks and adequacy of reserves; and determines the revenue requirements of the Wastewater Collection Fund for the next five years. The revenue requirements and resulting rate adjustment targets depend on a number of factors, including sales revenue projections, wastewater treatment costs, distribution system operating and capital improvement program (CIP) expenses, prudent funding of the Wastewater Collection Rate Stabilization Reserve (WW -RSR), the Emergency Plant Replacement (EPR) Reserve, and debt service payments. Any change in these factors can trigger an adjustment to the revenue requirement. During the budget process, staff forecasts customer load, revenues and utility expenses to quantify the annual revenue require ment. Changes to forecasted revenues or expenses are reflected in adjustments to the budget during the mid-year budget adjustment process. City of Palo Alto Page 2 Discussion Financial Projections Table 1 below shows actuals, budgeted and projected financial information for the Wastewater Collection Fund for FY 2011 through FY 2017. Table 1: Five-Year Financial Plan Adopted Actual Adopted Projected 2011 2011 2012 2012 2013 2014 2015 2016 2017 1 2 % CHANGE IN RETAIL RATE 0%0%0%0%5%9%9%8%3% 3 PROJECTED CHANGE IN RETAIL SALES REVENUE - - - - 715 1,352 1,473 1,428 578 4 5 RETAIL SALES REVENUE 14,356 14,294 14,371 14,304 14,990 16,315 17,783 19,213 19,826 6 CONNECTION AND CAPACITY FEES 730 1,081 740 740 750 761 771 794 817 7 OTHER / TRANSFERS IN 393 300 278 278 278 278 278 278 278 8 INTEREST 445 454 480 480 414 364 332 325 336 9 TOTAL SOURCES OF FUNDS 15,924 16,129 15,868 15,802 16,431 17,717 19,164 20,609 21,257 10 11 TREATMENT 7,499 7,414 7,954 7,954 8,556 8,984 9,433 9,905 10,400 12 DISTRIBUTION OPERATIONS 4,472 4,316 4,606 4,626 5,015 5,115 5,217 5,322 5,428 13 DEBT SERVICE 129 129 129 129 129 129 129 129 129 14 RENT 115 115 106 106 108 110 113 115 117 15 OTHER/ TRANSFERS OUT 567 401 88 88 88 88 88 88 88 16 CAPITAL IMPROVEMENT PROGRAMS 4,130 4,630 4,274 4,274 4,404 4,516 4,705 4,793 4,990 17 TOTAL USES OF FUNDS 16,912 17,005 17,158 17,178 18,300 18,942 19,685 20,351 21,152 18 19 INTO / (OUT OF) RESERVES (988) (876) (1,289) (1,376) (1,869) (1,225) (521) 258 105 Fiscal Year City of Palo Alto Wastewater Collection FINANCIAL PROJECTIONS (FY 2013 - FY 2017) ($'000) Cost Drivers The total use of funds for the Wastewater Collection Fund is projected to increase from the FY 2012 budget of $17.2 million to $21.2 million in FY 2017, an average annual increase of 4.7%. Treatment costs account for almost half of the total costs —about $8.0 million budgeted in FY 2012. Treatment costs are expected to increase by 7.6% in FY 2013 followed by increases of 5% per year reaching $10.4 million in FY 2017. The higher rate of increase in FY 2013 reflects the resumption of normal capital program expenditures at the treatment plant following a reduction in FY 2012. Annual costs for Utilities CIP and operations each account for roughly 25% of the total costs. The operations budget is expected to increase by about $400,000 in FY 2013, to reflect current work plans, which include new projects such as the evaluation of wastewater collection system efficiency, and possible addition of two new positions, a Business Analyst and a Water/Gas/Wastewater Inspector. The proposed budget is still under review by management and may change before it is reviewed by the Finance Committee in May. The assumptions provided in this report are used for financial projections purposes only. City of Palo Alto Page 3 The CIP budget is expected to increase by about $130,000 in FY 2013 with a projected increase of 3.4% per year thereafter due to planned project schedules as the Wastewater Collection Fund continues its system replacement projects. Staff projects a long-term net cost increase of 2% per year in other operating expenditures such as operations, maintenance and administration costs, allocated cost plan charges and Utilities administration charges, rent, and other transfers. This projection reflects the current expectations for economic activity for the region. The final operating budget proposal will be presented to the Finance Committee in May 2012. Revenue Requirement The revenue requirement of the Wastewater Collection Fund is the total amount of revenue it must collect in order to meet its operations and maintenance (O&M) expenses, debt service payments and rate-financed CIP expenditures. This revenue is collected through wastewater rates, and may be supplemented by revenu es from service connection and capacity fees, interest income, transfers in from other funds, and other miscellaneous revenues. The Wastewater Collection Fund is expected to have a revenue shortfall (projected costs greater than projected revenues) of $1.4 million and $2.6 million in FY 2012 and FY 2013, respectively. These shortfalls are able to be covered by drawing on the WW -RSR while still maintaining reserve levels above the minimum guideline levels. Due to healthy reserve levels in FY 2011, no revenue increases for wastewater collection services were requested in FY 2012. Staff’s preliminary estimate is that a rate adjustment of 5% in FY 2013 is needed followed by increases of 9%, 9%, 8% and 3% in the subsequent four fiscal years. Revenue Projections Retail sales constitute the largest source of revenue for the Wastewater Collection Fund. In FY 2011, total retail sales revenue was $14.3 million. The Wastewater Collection Fund did not have an overall rate increase since July 1, 2009. There was a revenue-neutral adjustment to rates to reflect cost of service alignment implemented on July 1, 2011. Retail sales revenue is expected to increase based on the revenue requirement projections discussed above. Other revenues in FY 2011 include service connection and capacity fees of $1.1 million, transfers in of $0.3 million and interest and gains on investments of $0.5 million. A rate of return on investment of 3% per year is assumed throughout the forecast horizon. Reserves and Risk Assessment The City Council establishes guidelines for Rate Stabilization Reserves. Table 2 summarizes the long-term minimum and maximum guideline levels for the WW-RSR for FY 2012 through FY 2014. As required by the RSR guidelines, staff performs an assessment of short -term risks for the fund on an annual basis. As part of this evaluation, staff estimates the revenue shortfall due to the maximum observed budget-to-actual variance in one year during the past ten years, plus an increase of 10% of planned CIP expenditures for the budget year. The result of this evaluation is provided in Table 2 below as “Risk Assessment”. City of Palo Alto Page 4 Table 2: Wastewater Rate Stabilization Reserve Guideline Levels and Short Term Risk Assessment ($M) Wastewater Collection Rate Stabilization Reserve (WW-RSR) FY 2012 FY 2013 FY 2014 Estimated End of Year Balance 6.4 4.5 3.3 Risk Assessment 1.9 2.0 2.1 Minimum Level Guidelines (15% of sales revenues) 2.2 2.3 2.4 Maximum Level Guidelines (30 % of sales revenues) 4.3 4.5 4.9 Based on the City’s Comprehensive Annual Financial Report (CAFR) for FY 2011, the WW-RSR ended the fiscal year with a balance of $5.9 million. The WW-RSR balance is forecast to be $6.4 million at the end of FY 2012, which is above the long-term maximum guideline level as well as the short-term risk assessment level. For FY 2013, balances are projected to be at the long- term maximum guideline, if cost and revenue projections remain relatively consistent with financial forecasts. The final expected reserve balance levels will be determined after the completion of the Wastewater Collection Fund budget. Comparison of Wastewater Rates for Palo Alto and Surrounding Cities For several years, Palo Alto's retail wastewater collection rates have generally been on par with surrounding areas. Table 3 below compares monthly wastewater collection bills using rates as of January 1, 2012 for Mountain View, Redwood City, Santa Clara and Menlo Park. Based on current rates, the average residential customer in surrounding cities pays approximately 42% more than the average Palo Alto residential customer. At this time, the certainty or magnitude of other jurisdictions’ planned rate changes is not known. Table 3 – Monthly Residential Wastewater Collection Bill Comparison (rates in effect as of January 1, 2012) Wastewater Palo Alto Mountain View Redwood City Santa Clara Menlo Park Average Benchmark Residential $ 27.91 $ 22.99 $ 53.10 $ 24.54 $ 57.50 $39.53 Difference from CPAU -17.6% 90.3% -12.1% 106.0% 41.6% Commission Review and Recommendations The UAC discussed the Wastewater Collection Fund’s financial projections at its February 1, 2012 meeting. Commissioners questioned some of the reasons behind the cost increase s projected in the report. Commissioners also noted the relative stability of revenues in Wastewater Collection Fund compared to the Water Fund. Draft minutes from the UAC’s February 1, 2011 meeting are provided as Attachment B. Attachments: City of Palo Alto Page 5  Attachment A: Financial Projections for Wastewater Collection Utility (FY 2013 - FY 2017) (PDF)  Attachment B: Excerpts from Draft UAC Minutes (PDF) ($000's) Adopted Actual Adopted Projected 2011 2011 2012 2012 2013 2014 2015 2016 2017 1 0.0% 0.0% 0.0% 0.0% 5.0% 9.0% 9.0% 8.0% 3.0% 2 WASTEWATER REVENUE 3 REVENUE:14,371 14,304 14,371 14,304 14,304 15,020 16,371 17,845 19,272 4 RATE ADJUSTMENT 0 0 0 0 715 1,352 1,473 1,428 578 5 PRORATION IMPACT 0 0 0 0 (30) (56) (61) (59) (24) 6 TOTAL ADJUSTED REVENUE 14,371 14,304 14,371 14,304 14,990 16,315 17,783 19,213 19,826 7 DISCOUNTS/UNCOLLECT.(15) (11)0 0 0 0 0 0 0 8 INTEREST 445 454 480 480 414 364 332 325 336 9 CONNECTION AND CAPACITY FEES 730 1,081 740 740 750 761 771 794 817 10 OTHER / TRANSFERS IN 393 300 278 278 278 278 278 278 278 11 FROM RESERVES: 12 RATE STABILIZATION 988 876 1,289 0 1,869 1,225 521 0 0 13 COMMITMENTS & REPPROPRIATIONS 0 0 0 1,862 0 0 0 0 0 14 TOTAL FINANCIAL RESOURCES 16,912 17,005 17,158 17,663 18,300 18,942 19,685 20,609 21,257 15 OPERATING EXPENSES 16 TREATMENT 7,499 7,414 7,954 7,954 8,556 8,984 9,433 9,905 10,400 17 CUSTOMER DESIGN & CONN. (CIP)330 830 340 340 350 361 372 383 394 18 SYSTEM IMPROVEMENT (CIP)3,800 3,800 3,934 3,934 4,054 4,155 4,333 4,410 4,596 19 CUSTOMER SERVICES 269 281 266 286 292 298 304 310 316 20 OPERATIONS 2,709 2,422 2,818 2,818 3,141 3,204 3,268 3,334 3,400 21 ALLOCATED CHARGES:1,494 1,613 1,522 1,522 1,581 1,613 1,645 1,678 1,711 22 TOTAL MAJOR ACTIVITIES 16,101 16,360 16,834 16,854 17,975 18,615 19,355 20,019 20,818 23 DEBT SERVICE 129 129 129 129 129 129 129 129 129 24 TRANSFERS: 25 OPERATING TRANSFERS OUT 567 401 88 88 88 88 88 88 88 26 RENT 115 115 106 106 108 110 113 115 117 27 TOTAL OPERATING EXPENSES 16,912 17,005 17,158 17,178 18,300 18,942 19,685 20,351 21,152 28 RESERVE ADDITIONS: 29 PLANT REPLACEMENT 0 0 0 0 0 0 0 0 0 30 RATE STABILIZATION 0 0 0 486 0 0 0 258 105 31 TOTAL RESERVE ADDITIONS:0 0 0 486 0 0 0 258 105 32 TOTAL REVENUE REQUIREMENT 16,912 17,005 17,158 17,663 18,300 18,942 19,685 20,609 21,257 33 RESERVES BALANCES 34 PLANT REPLACEMENT 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 35 RATE STABILIZATION 5,784 5,896 4,078 6,382 4,513 3,288 2,767 3,024 3,129 36 TOTAL RESERVES BALANCES 6,784 6,896 5,078 7,382 5,513 4,287 3,766 4,024 4,129 37 38 COMMITMENTS & REAPPROPRIATIONS 10,250 39 RATE STABILIZATION RESERVE GUIDELINES 40 41 Short Term Risk Assessment Value 1,815 1,815 1,879 1,879 1,958 2,105 2,275 2,431 2,513 43 Long Term Rate Stabilization Guidelines 44 RSR Minimum 2,156 2,156 2,156 2,156 2,253 2,456 2,677 2,891 2,978 45 RSR Maximum 4,311 4,311 4,311 4,311 4,506 4,911 5,353 5,782 5,955 2011 2011 2012 2012 2013 2014 2015 2016 2017 Fiscal Year % CHANGE IN RETAIL RATE WASTEWATER COLLECTION E X P E N S E S R E V E N U E S R E S E R V E S FINANCIAL PROJECTIONS (FY 2013 - FY 2017) City of Palo Alto Wastewater Collection Excerpts from February 1, 2012 UAC Meeting Wastewater Utility Financial Projections (FY 2013 –FY 2017) Senior Resource Planner Ipek Connolly presented the five-year financial projections for wastewater. She noted that after two years with no revenue increase, the City needs a 5% revenue increase in FY 2013 to cover costs. She added that actual rate proposals will be presented to the UAC on March 27. Commissioner Melton noted that this fund has stable costs and the issue is really reserve management. Rather than having bumpy projections for the five years (5%, 7%, 11%, 5%, and 5%), that it would be more acceptable to smooth out the rate changes over the five year forecast period so that there is no double digit increase in the forecast. Commissioner Cook asked why the treatment costs are going up so much over the next two years. Connolly explained that treatment plant expects future increases to continue at the 5% rate that has occurred in the past several years. Commissioner Cook pointed out that the amount of increase was higher for FY 2013 than for the following years. Connolly stated that for treatment costs, budget proposals for FY 2013 were presented as proposed by the Regional Water Quality Control Plant Manager as of December 2011, including an assumption of 5% annual increase for future years. Vice Mayor Scharff asked what caused the operations costs to increase so much from FY 2012 to FY 2013. Connolly stated that the increase in costs could be due to special studies or possibly include a request for new employees for FY 2013. The specifics of FY 2013 budget requests would be reviewed by the UAC during the budget review process in May. Director Fong stated that some of this was driven by the increases in regulations regarding compliance requirements and increased reporting requirements. Commissioner Eglash pointed out that one take away from the Councilmember’s question is that a couple of line item costs are jumping between 2012 and 2013, specifically in treatment and operations areas. He stated that it would be interesting to get more information in these areas in future meetings. Senior Management Analyst Dave Yuan explained that $90,000 was due to the evaluation of wastewater collection system efficiency, and $140,000 was due to the two new potential positions, a Business Analyst and a Water/Gas/Wastewater Inspector. Director Fong pointed out that budget proposals are still under review by management and may change before they are reviewed by the UAC in May. They are provided in this report as indicative for financial projections purposes only. Commissioner Keller asked why revenue does not change as much as the rate. Connolly stated that, unlike the water fund, for the wastewater fund, the revenue is collected through fixed charges from the residential customers, and for some large commercial customers it is based on water consumption during winter months which tends to be more stable.