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HomeMy WebLinkAboutStaff Report 7855 City of Palo Alto (ID # 7855) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/4/2017 City of Palo Alto Page 1 Summary Title: FY 2018 Wastewater Collection Financial Plan and Rate Proposals Title: Utilities Advisory Commission Recommendation That the City Council Adopt a Resolution Approving the Fiscal Year 2018 Wastewater Collection Financial Plan From: City Manager Lead Department: Utilities Recommendation Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee recommend that the Council: 1. Adopt a resolution (Attachment A) approving the fiscal year (FY) 2018 Wastewater Collection Financial Plan (Attachment B); Executive Summary The FY 2018 Wastewater Collection Utility Financial Plan includes projections of the utility’s costs and revenues through FY 2027. Treatment costs are projected to rise substantially over the forecast period due to increasing operating costs and capital replacement needs at the Regional Water Quality Control Plant, as well as gradually increasing capital and operating cost increases for the wastewater collection system. However, this utility’s Operating Reserves are higher than required by the reserve guidelines due to a one-time savings resulting from delays in the utility’s annual main replacement program. As a result, staff projects the need for no wastewater rate increase in FY 2018. Rate increases of 7% are projected for FY 2019 through FY 2023. Rates for FY 2024 and beyond are projected to increase by 3 to 5%. The UAC reviewed the Wastewater Collection Financial Plan and Rate Proposals at its meeting on March 1, 2017, and unanimously recommended approval of the proposed financial plan. Background Every year staff presents the Financial Plans for its Electric, Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments required to maintain their financial health. These Financial Plans include a comprehensive overview of the utility’s operations, City of Palo Alto Page 2 both retrospective and prospective, and are intended to be a reference for UAC and Council members as they review the budget and staff’s rate recommendations. Each Financial Plan also contains a set of Reserves Management Practices describing the reserves for each utility and the management practices for those reserves. The Finance Committee reviewed preliminary financial forecasts at its March 21, 2017 meeting. Staff has not revised the preliminary projections presented at that meeting. Discussion Staff’s annual assessment of the financial position of the City’s wastewater collection utility is completed to ensure adequate revenue to fund operations, in compliance with the cost of service requirements set forth in the California Constitution (Proposition 218). This includes making long-term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. The current rates are based on the methodology described in the 2011 Wastewater Collection Utility Cost of Service and Rate Study completed by Utility Financial Solutions (Staff Report 1399). Proposed Actions for FY 2018 1. No rate increase These proposed actions are described in more detail in the FY 2018 Wastewater Collection Financial Plan (Attachment B). Staff proposes no adjustments to wastewater rates at this time. Current rates are shown in Table 1 below. Table 1: Current Wastewater Collection Charges Current (7/1/2016) City of Palo Alto Page 3 Monthly Service and Minimum Charges ($/month) S-1 (Residential) Service charge $34.83 S-2 (Commercial), S-6 (Restaurant) Minimum 34.83 Quantity Rates S-1 (Residential) $/CCF N/A S-2 (Commercial) $/CCF 6.71 S-6 (Restaurant) $/CCF 10.38 S-7 (Industrial) $/CCF 3.08 (1) Monthly charges for S-1 are fixed monthly charges, and those for S-2 and S-6 are minimum monthly charges. (2) Currently there are no customers on the S7 rate schedule, however, CPAU continues to maintain it in case there is a need for the rate schedule in the future. FY 2018 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 2 shows the projected rate adjustments included in the Wastewater Collection Utility Financial Plans and their impact on a residential wastewater bill. Table 2: Projected Rate Adjustments and Residential Bill Impact, FY 2018 to FY 2022 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Wastewater Utility 0% 7% 7% 7% 7% Estimated Bill Impact for Residential Customers ($/mo) $- $2.44 $2.61 $2.79 $2.99 The main drivers for the increase in the Wastewater Collection Utility’s costs (and therefore rates) over the next several years are the costs for wastewater treatment, which are projected to go up by 5 to 6% per year as the Regional Water Quality Control Plant makes several upgrades to their facilities, as well as capital improvement costs for the wastewater collection system. Operating and CIP costs are projected to rise roughly 2%-4% annually. As mentioned above, staff is not proposing a rate increase for FY 2018 because the Wastewater Collection Utility’s Operations Reserve is well above the target level set forth in the Reserve Guidelines. The Operations Reserve is projected to be $5.3 million, as compared to the reserve target of $4.6 million. Wastewater main replacement projects are temporarily delayed for a variety of reasons: The University Avenue Business District project is taking longer to coordinate than planned; fewer, more expensive competitive bidders on proposed projects have required staff to re-plan those projects; and hiring and retention of qualified staff has been an issue. There is uncertainty related to capital costs for the Wastewater Collection Utility in coming years. Wastewater main replacement costs have risen substantially in recent years, and it is possible higher CIP expenditures will be required in the future. City of Palo Alto Page 4 Wastewater Bill Comparison with Surrounding Cities The annual sewer bill for a Palo Alto resident is $418 under current rates, 31% lower than the average neighboring community. Table 3 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. Table 3: Residential Monthly Sewer Bill Comparison (based on rates as of January 1, 2017) Palo Alto Neighboring Communities Neighboring Community Average Menlo Park Redwood City Mountain View Los Altos Santa Clara Hayward 34.83 85.91 75.11 34.30 33.93 41.65 29.80 50.12 Staff has no information at this time as to whether or when the surrounding communities are planning wastewater rate changes. Changes from Prior Financial Forecasts Staff has projected the need for wastewater rate increases for several years. Table 4 compares current rate projections to those projected in the last two year’s Financial Plans. Table 4: Projected Wastewater Rate Trajectory for FY 2018 to FY 2027 Projection FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 Current (FY 2018 Financial Plan) 0% 7% 7% 7% 7% 7% 5% 5% 4% 3% Last Year (FY 2017 Financial Plan) 10% 9% 7% 6% 4% 4% 4% 4% 4% N/A Two years ago (FY 2016 Financial Plan) 9% 9% 6% 6% N/A N/A N/A N/A N/A N/A Commission Review and Recommendation The UAC reviewed this proposal at its March 1, 2017 meeting. Staff noted that the rate projection had changed since the February 1, 2017 meeting, as a further review of Operations reserves indicated a 2% increase was not required at this time. After the presentation, the UAC voted to recommend that the Council adopt the resolution approving the FY 2018 Wastewater Collection Financial Plan. The vote was unanimous (7-0). The draft excerpted minutes from the UAC’s March 1, 2017 meeting are provided as Attachment C. Timeline City of Palo Alto Page 5 As no rate changes are being proposed at this time, no public noticing is required by Article XIIID of the State Constitution (added by Proposition 218). The proposed Financial Plan will be considered by the City Council with the FY 2018 budget. Resource Impact See the FY 2018 Wastewater Collection Utility Financial Plan (Attachment B) for a more comprehensive overview of projected cost and revenue changes for the next five years. Policy Implications The proposed Wastewater Collection Financial Plan is consistent with Council-adopted Reserve Management Practices. Environmental Review The Finance Committee’s review and recommendation to Council on the proposed FY 2018 Wastewater Collection Financial Plan does not meet the definition of a project requiring California Environmental Quality Act (CEQA) review, under California Public Resources Code 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment. Attachments:  Attachment A: Resolution Approving the FY 2018 Wastewater Collection Financial Plan  Attachment B: Proposed FY 2018 Wastewater Collection Financial Plan  Attachment C: Excerpt of the Draft March 1, 2017 Utilities Advisory Commission Minutes Attachment A * NOT YET APPROVED * 170221 jb 6053915 Resolution No. ____ Resolution of the Council of the City of Palo Alto Approving the FY 2018 Wastewater Collection Utility Financial Plan R E C I T A L S A. Each year the City of Palo Alto (“City”) assesses the financial position of its utilities with the goal of ensuring adequate revenue to fund operations. This includes making long-term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. It does this with the goal of providing safe, reliable, and sustainable utility services at competitive rates. The City adopts Financial Plans to summarize these projections. B. The City uses reserves to protect against contingencies and to manage other aspects of its operations, and regularly assesses the adequacy of these reserves and the management practices governing their operation. The status of utility reserves and their management practices are included in Reserves Management Practices attached to and made a part of the Financial Plans. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby approves the FY 2018 Wastewater Collection Utility Financial Plan. SECTION 2. The Council finds that the adoption of this resolution does not meet the definition of a project requiring California Environmental Quality Act (CEQA) review, under / / / / / / / / / / / / Attachment A * NOT YET APPROVED * 170221 jb 6053915 California Public Resources Code 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: ___________________________ ___________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: ___________________________ ___________________________ Senior Deputy City Attorney City Manager ___________________________ Director of Utilities ___________________________ Director of Administrative Services FY 2018 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2018 TO FY 2027 ATTACHMENT B WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 2 | Page FY 2018 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2018 TO FY 2027 TABLE OF CONTENTS Section 1: Definitions and Abbreviations................................................................................ 4 Section 2: Executive Summary and Recommendations ........................................................... 4 Section 2A: Overview of Financial Position .................................................................................. 4 Section 2B: Summary of Proposed Actions .................................................................................. 5 Section 3: Detail of FY 2018 Rate and Reserves Proposals ....................................................... 5 Section 3A: Rate Design ............................................................................................................... 5 Section 3B: Current and Proposed Rates ..................................................................................... 6 Section 3D: Proposed Reserve Transfers ..................................................................................... 6 Section 4: Utility Overview .................................................................................................... 7 Section 4A: Wastewater Utility History ....................................................................................... 7 Section 4B: customer base ........................................................................................................... 8 Section 4C: Collection System ...................................................................................................... 8 Section 4D: Cost Structure and Revenue Sources ........................................................................ 9 Section 4E: Reserves Structure ..................................................................................................... 9 Section 4F: Competitiveness ...................................................................................................... 10 Section 5: Utility Financial Projections ................................................................................. 11 Section 5A: FY 2012 to FY 2016 Cost and Revenue Trends ........................................................ 11 Section 5B: FY 2016 Results ....................................................................................................... 12 Section 5C: FY 2017 Projections ................................................................................................. 13 Section 5D: FY 2018 – FY 2027 Projections ................................................................................ 13 Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 14 Section 5F: Alternate Scenarios ................................................................................................. 16 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 3 | Page Section 5G: Long-Term Outlook ................................................................................................. 16 Section 6: Details and Assumptions ..................................................................................... 16 Section 6A: Wastewater Treatment Costs ................................................................................. 16 Section 6B: Operations .............................................................................................................. 17 Section 6C: Capital Improvement Program (CIP) ....................................................................... 17 Section 6D: Debt Service ............................................................................................................ 19 Section 6E: Other Revenues ....................................................................................................... 20 Section 7: Communications Plan .......................................................................................... 20 Appendices ......................................................................................................................... 22 Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 23 Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 24 Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 25 Appendix D: Sample of Wastewater Collection Outreach Materials......................................... 28 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 4 | Page SECTION 1: DEFINITIONS AND ABBREVIATIONS CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons. When water usage is used to assess wastewater charges for commercial customers, it is measured in CCF. CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department FOG Fats, oils, and grease. When flushed into the sewer system, these materials accumulate in parts of the sewer system and create blockages. O&M Operations and Maintenance RWQCP Regional Water Quality Control Plant, the wastewater treatment plant owned and operated by the City of Palo Alto that serves Palo Alto and several surrounding communities. UAC Utilities Advisory Commission SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City of Palo Alto’s Wastewater Collection Utility for the next ten years. The Financial Plan provides revenues to cover the costs of operating the utility safely over that time while adequately investing for the future. It also addresses the financial risks facing the utility over the short term and long term, and includes measures to mitigate and manage those risks. SECTION 2A: OVERVIEW OF FINANCIAL POSITION Overall costs in the Wastewater Collection Utility are expected to rise by about 6% per year from fiscal year (FY) 2017 to FY 2027. Excluding FY 2018 (which, unlike a normal year, does not include a sewer main replacement project), wastewater treatment and CIP costs are projected to rise by five to six percent annually through the projection period, with other costs rising at roughly three percent per year. The costs for the Wastewater Collection Utility are shown in Table 1 below. Table 1: Expenses for FY 2016 to FY 2027 Expenses ($000) FY 2016 (act.) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 Treatment Costs 8,770 9,855 9,932 10,298 11,088 11,885 12,293 13,001 14,056 14,928 15,407 15,901 Operations 5,429 6,142 6,342 6,142 6,349 6,561 6,779 7,250 7,354 7,594 7,842 8,099 Capital Projects 4,985 971 1,338 5,218 5,033 5,207 5,336 5,495 5,658 5,827 6,000 6,178 TOTAL 19,184 16,968 17,613 21,659 22,470 23,652 24,408 25,746 27,069 28,348 29,249 30,178 The short term reduction in CIP expenses will result in higher revenues than expenses, and the Rate Stabilization Reserve will be drawn down over a longer time frame than projected in last WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 5 | Page year’s financial plan. Going forward, to ensure that revenues cover rising costs and reserves remain healthy, the financial plan includes the rate trajectory shown in Table 2. The table also shows rate projections from last year’s Financial Plan. Last year’s plan projected earlier, more aggressive rate increases. However, the delay of the planned FY 2017 and FY 2018 sewer main replacement projects resulted in an increase in reserves, which enabled the more gradual increases projected in the current plan. Table 2: Projected Wastewater Collection Rate Trajectory for FY 2018 to FY 2026 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 Current Plan 0% 7% 7% 7% 7% 7% 5% 5% 4% 3% FY 2017 Plan 10% 9% 7% 6% 4% 4% 4% 4% 4% N/A The Wastewater Collection Utility has a small balance in its Rate Stabilization Reserve. This reserve is used to phase in rate increases over several years. The FY 2017 Financial Plan proposed a $342,000 transfer from the Rate Stabilization Reserve, but in the proposed FY 2018 Financial Plan this transfer is moved to later years. Due to the delays in main replacement noted above, the Operations reserve is above its target level, and will rise again in FY 2018 before beginning to decline. This Financial Plan projects that the Rate Stabilization Reserve will not be needed until FY 2020. Table 3: Transfers To/(From) Reserves for FY 2017 to FY 2027 ($000) Reserve FY 2017 FY 2018 FY 2019 to FY 2027 Rate Stabilization - - (342) Operations - - 342 SECTION 2B: SUMMARY OF PROPOSED ACTIONS Staff proposes no rate changes or transfers for the Wastewater Collection Utility in FY 2017 and FY 2018. SECTION 3: DETAIL OF FY 2018 RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Wastewater Collection Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in the California Constitution (Proposition 218). Current rates were structured based on staff’s annual assessment of the wastewater utility’s financial position, as well as the methodology from the January 2011 Wastewater Collection Utility Cost of Service & Rate Study completed by Utility Financial Solutions (Staff Report 1399). Staff plans to review and update this cost of service study in FY 2018 or FY 2019, unless any major changes occur to the utility’s operations or customer base that would necessitate an earlier study. Before conducting any new cost of service study, staff will review current rates and the scope of the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 6 | Page SECTION 3B: CURRENT AND PROPOSED RATES The current rates were adopted July 1, 2016, when the City increased sewer rates by 9%. CPAU has three sewer rate schedules: one for residents (S-1), one for commercial customers (S-2), and a special schedule for restaurants (S-6), which discharge higher than average amounts of grease and oil and, therefore, have a greater impact on the sewer system. Residential customers are billed a monthly service charge, while commercial customers are billed based on their dry month water usage (previous January through March). This closely approximates non- irrigation water consumption, which represents actual sewer use. Restaurant customers are billed monthly based on water usage. CPAU also maintains a rate schedule for industrial dischargers (S-7), but there are currently no customers required to be on this rate schedule. CPAU us not proposing any rate changes for FY 2018 at this time. Table 4, below, summarizes the current rates for all customer classes. Comparisons with neighboring communities are discussed in Section 4F: Competitiveness. Table 4: Current Sewer Rates Current (as of 7/1/2016) Monthly Service and Minimum Charges ($/month) S-1 (Residential) Service charge $34.83 S-2 (Commercial), S-6 (Restaurant) Minimum $34.83 Quantity Rates: based on winter water usage (average for January - March bill period) S-2 (Commercial) $/CCF 6.71 S-6 (Restaurant) $/CCF 10.38 S-7 (Industrial) $/CCF 3.08 SECTION 3C: PROPOSED RESERVE TRANSFERS In the FY 2017 Financial Plan, staff recommended a $1.95 million transfer from the Rate Stabilization Reserve in FY 2016. This left a small amount, $342,000, which was originally to be transferred in FY 2017 and bring the Rate Stabilization Reserve balance to zero. With main replacement projects being deferred in FY 2017 and FY 2018, the Operations reserve will not require a transfer from the Rate Stabilization Reserve. It is now anticipated that the remaining $342,000 will not need to be transferred until FY 2020. These transfers are included in the financial projections in this Financial Plan, and will enable CPAU to maintain adequate Operations Reserve levels while moderating the pace of increase in Wastewater Collection rates. The impact of these transfers on reserves levels can be seen in Appendix A: Wastewater Collection Financial Forecast Detail. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 7 | Page SECTION 4: UTILITY OVERVIEW This section provides an overview of the utility and its operations. It is intended as general background information and to help readers better understand the forecasts in later sections. SECTION 4A: WASTEWATER UTILITY HISTORY The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its first three decades the system grew to 60 miles of sewers. Raw sewage was discharged into Mayfield Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of Health, Palo Alto built the South Bay’s first wastewater treatment plant. At that time the sewer system served 20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded twice in the 1940s and 1950s to increase capacity.1 At the same time, the postwar population and industrial boom in the 1950s required rapid expansion of the sewer system. In the first half of the 1960s Palo Alto’s area doubled, as did wastewater flows, overwhelming the capacity of several of the utility’s “trunk lines,” which are the largest diameter main sewer lines carrying wastewater to the treatment plant. This prompted the City, in 1965, to perform the first of its sewer master plans to identify needed capacity improvements. At that point the Wastewater Utility’s system comprised more than 150 miles of sewer mains.2 In 1968 the City signed agreements with the Cities of Mountain View and Los Altos to build a new regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City had been providing treatment services to the East Palo Alto Sanitary District through an existing agreement, and was also serving Stanford University by transporting wastewater across the City’s sewer system to the treatment plant. Both of these organizations became partners in the RWQCP as well. At the same time the Town of Los Altos Hills became the sixth partner as it signed an agreement with the City to connect the Town’s sewer system to the City’s sewer system to carry wastewater to the new RWQCP. The current agreements for the RWQCP extend through 2035.3 In the 1980s the City directed increased attention to the condition of its sewer system, performing a series of studies of groundwater inflow and infiltration into the system. The studies found high rates of infiltration, estimating that as much as 40% of the water going to the RWQCP from Palo Alto’s system was groundwater and stormwater rather than wastewater.4 In some parts of Palo Alto the land surface had subsided due to groundwater pumping by the water utility, and though that practice had ceased many years earlier as the water utility switched to the Hetch Hetchy Regional Water System, parts of the city had already subsided two to five feet. This subsidence had damaged several parts of the sewer collection system, leading to reduced slopes for sewer mains that caused reductions in capacity. In 1 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1 through 2-2 2 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143 3 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2 4 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 8 | Page response to these studies the City commenced an accelerated sewer system rehabilitation program.5 At that point the sewer system comprised over 190 miles of mains.6 A Master Plan study in 1988 recommended a variety of capacity expansions, and in the 1990s the City completed about half of them. However, a 2004 Master Plan update found that the accelerated sewer rehabilitation plan started in the early 1990s had substantially reduced infiltration, easing the capacity problems that had led the to the recommended capacity increases in the 1988 study. Several of the outstanding projects were canceled and replaced with a different set of projects.7 At the same time the City updated its hydraulic model and developed greater capacity to do system planning in house. SECTION 4B: CUSTOMER BASE The City of Palo Alto’s Wastewater Collection Utility provides sewer service to the residents and businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides treatment services for surrounding communities in addition to Palo Alto. Nearly 23,300 customers are connected to the sewer system, approximately 21,450 (92%) of which are residential and 1,850 (8%) of which are non-residential. Residential customers pay a flat fee for service. Non-residential customers are billed for sewer service based on their metered winter water usage. There is little variability in revenues for this utility. SECTION 4C: COLLECTION SYSTEM The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement with several surrounding communities. Palo Alto is responsible for 35% to 40% of the wastewater sent to the RWQCP. The cost of running the RWQCP is contained in the Wastewater Treatment Utility and is not described in detail in this Financial Plan, but since these costs are a major driver of CPAU’s sewer rates, there is some discussion of future trends in treatment costs in Section 6A: Wastewater Treatment Costs. Treatment costs make up nearly half of the Wastewater Collection Utility’s expenses as shown in Table 1 above. To collect wastewater from its customers and deliver it to the RWQCP, CPAU owns roughly 18,100 sewer laterals (which collect wastewater from customers’ plumbing systems) and 217 miles of sewer mains (which transport the waste to the treatment plant). These laterals and mains, along with the associated manholes and cleanouts, represent the vast majority of infrastructure used to collect wastewater in Palo Alto. CPAU conducts a sewer rehabilitation and replacement program to replace mains over time as they deteriorate or to increase capacity. For more discussion of this program, see Section 6C: Capital Improvement Program (CIP). CIP expense accounts for roughly a quarter of the utility’s expenditures. In addition to its CIP, CPAU performs various maintenance activities on the sewer system. These include inspecting and repairing sewer laterals, responding to sewer overflows, regularly 5 CMR 183:90, Infrastructure Review and Update, March 1, 1990 6 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2 7 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 9 | Page cleaning sections of the system heavily impacted by fats, oils, and grease (FOG), and building and replacing sewer laterals for new or redeveloped buildings. The utility also shares the costs of other operational activities (such as customer service, billing, equipment maintenance, and street restoration) with the City’s other utilities. These maintenance and operations expenses, as well as associated administration, debt service, rent, and other costs, make up another quarter of the utility’s expenses. SECTION 4D: COST STRUCTURE AND REVENUE SOURCES In FY 2016, treatment costs represented nearly half of the Wastewater Collection Utility’s costs (47%), followed by Capital (27%) and Operations costs (26%). These expenditures are shown in Figure 1. The utility’s revenue in FY 2016, shown in Figure 2, came primarily from sewer charges (94%), with the remainder coming mainly from capacity and connection fees and other sources (6%). Figure 1: Cost Structure (FY 2016) Figure 2: Revenue Structure (FY 2016) SECTION 4E: RESERVES STRUCTURE CPAU maintains six reserves for its Wastewater Collection Utility to manage various types of contingencies. These are summarized below, but see Appendix C: Wastewater Collection Utility Reserves Management Practices for more detailed definitions and guidelines for reserve management: • Reserve for Commitments: A reserve equal to the utility’s outstanding contract liabilities for the current fiscal year. Most City funds, including the General Fund, have a Commitments Reserve. • Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated by the City Council, nearly all of which are capital projects. Most City funds, including the General Fund, have a Reappropriations Reserve. • Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate funds for future expenditure on CIP projects and is anticipated to be empty unless a major one-time CIP expenditure is expected in future years. It also acts as a WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 10 | Page contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. • Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large rate increases are anticipated in the forecast period. In that case, funds can be accumulated to spread the impact of those future rate increases across multiple years. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. • Operations Reserve: This is the primary contingency reserve for the Wastewater Collection Utility, and is used to manage yearly variances from budget for operational costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. • Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and is normally empty. SECTION 4F: COMPETITIVENESS Table 6 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. The annual sewer bill for a Palo Alto customer is $418 under current rates, 31% lower than the average neighboring community. Palo Alto has the fourth lowest bill of the group. Table 5: Residential Monthly Sewer Bill Comparison Palo Alto Neighboring Communities Neighboring Community Average Menlo Park Redwood City Mountain View Los Altos Santa Clara Hayward 34.83 85.91 75.11 34.30 33.93 41.65 29.80 50.12 Based on rates as of February 2017 Table 7 compares the sewer bills for two classes of commercial customers to what they would be under surrounding communities’ rate schedules. Note that other communities often have specific rates for industrial customers that discharge high intensity wastewater, such as food processors or chemical or electronics manufacturers, but Palo Alto does not currently have any customers that require these special rates. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates, but is not the most expensive jurisdiction in all cases. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 11 | Page Table 6: Commercial Monthly Sewer Bill Comparison Palo Alto Neighboring Communities Neighboring Community Average Menlo Park Redwood City Mountain View Los Altos Santa Clara Hayward General Commercial $ 94.00 $ 33.14 $ 75.11 $ 62.86 $ 50.76 $ 65.94 $ 62.02 $ 74.97 Restaurant 581.10 664.72 781.08 490.56 137.70 590.24 463.12 521.24 Based on rates as of February 2017 SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION 5A: FY 2012 TO FY 2016 COST AND REVENUE TRENDS Figure 3 shows the Wastewater Collection Utility’s actual expenses and revenues for the past five years and projections through FY 2027. Operations costs were low in FY 2012, but in general expenses have grown with inflation at around 2% per year. Capital Investment grew on average by around 3%, with FY 2014 and FY 2015 seeing a reduction in investment mainly due to delayed main replacement projects. Treatment costs stayed relatively flat during this time frame. Since the revenue for this utility is very stable, revenue changes closely follow rate changes. The other large revenue item of note is the continued connection and capacity fees from new construction. These fees have grown dramatically since FY 2010, and it is uncertain when this trend may dampen. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 12 | Page Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes Actual Costs through FY 2016 and Projections through FY 2027 SECTION 5B: FY 2016 RESULTS Forecasted revenues for FY 2016 were lower than projected ($16.6 million actual vs. $18 million projected), but expenses related to Administration and Customer Service activities came in well below expected budget as well. Total FY 2016 expenses were $18.5 million compared to projections of $19.9 million in the FY 2017 Financial Plan. Table 8 summarizes the variances from forecast. Table 7: FY 2016, Actual Results vs. Financial Plan Forecast Net Cost/ (Benefit) Type of change Admin and customer service costs lower than projected (806,000) Cost savings Sales revenues lower than forecast 657,000 Revenue decrease Connection, capacity fees and other revenues were lower than forecasted 119,000 Revenue decrease Operations, capital and other cost increases 131,000 Cost increase Net Cost / (Benefit) of Variances ($101,000) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 13 | Page SECTION 5C: FY 2017 PROJECTIONS The most notable change from the FY 2017 budget identified at this time is the deferral of Wastewater Collection System Rehabilitation Project 28. Originally budgeted at $3.5 million, this project is now anticipated to start in FY 2019. Also deferred to FY 2019 will be the design phase of Project 29, budgeted at $328,000. Capital Improvement issues are further discussed in Section 6c below. SECTION 5D: FY 2018 – FY 2027 PROJECTIONS Staff has prepared a forecast of costs and revenues through FY 2027. As shown in Figure 3 above (and, in more detail, in Appendix A: Wastewater Collection Financial Forecast Detail), the Wastewater Collection Utility’s total costs are projected to increase by roughly 6% per year on average for FY 2017 through FY 2027. The majority of this increase is due to projected treatment cost increases. The treatment plant itself is facing the need for major upgrades in coming years, both due to age of equipment and constantly changing environmental regulations. While the costs of the plant are shared among member agencies, Palo Alto is still expected to see average cost increases of 5% per year over the forecast horizon. Revenues are shown by the red line in Figure 3, and what is notable here is that costs have been generally higher than revenue. Some relief was experienced during times of lower CIP expenditures, and this is projected to be seen in FY 2017 and 2018. The trend of under- collection picks up in the future, however, resulting in a fairly rapid reduction of reserves. A path of 7% annual rate increases in the near term, decreasing to more inflationary increases in outer years, is required to keep reserves from dropping too low. Figure 4 below shows the relative drop in reserves, only showing slowing replenishment after the projected increase in FY 2021. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 14 | Page Figure 4: Wastewater Collection Reserves Projections SECTION 5E: RISK ASSESSMENT AND RESERVES ADEQUACY The Wastewater Collection Utility currently has one contingency reserve, the Operations Reserve, and this Financial Plan maintains reserves within the approved guideline levels throughout the forecast period, as shown in Figure 5 below. Reserve levels also exceed the short term risk assessment for the utility. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 15 | Page Figure 5: Operations Reserve Adequacy Staff performs an annual assessment of risks for the Wastewater Collection Utility. For this evaluation, staff estimates the revenue shortfall due to: 1. the maximum observed budget-to-actual variance in one year during the past five years; 2. an increase of 10% in system improvement CIP expenditures for the year; and 3. an increase of 10% in treatment costs. Table 9 summarizes the risk assessment calculation for the Wastewater Collection Utility through FY 2022. The Operations Reserve is projected to be adequate to manage these levels of risk over the entire forecast period. Table 8: Wastewater Collection Risk Assessment FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Total Revenue ($000) 17,146 18,296 19,577 20,947 22,413 Max. Historical Budget-to-Actual variance 3% 3% 3% 3% 3% Budget-to-Actual Risk ($000) 514 549 587 628 672 System Rehabilitation CIP Budget ($000) 933 4,800 4,602 4,763 4,880 CIP Contingency @10% ($000) 93 480 460 476 488 Treatment Budget ($000) 9,932 10,298 11,088 11,885 12,293 Treatment Cost Contingency @10% ($000) 993 1,030 1,109 1,188 1,229 Total risk assessment value ($000) 1,600 2,059 2,156 2,292 2,389 Projected Operations Reserve Level ($000) 6,688 5,410 5,069 4,529 4,732 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 16 | Page SECTION 5F: ALTERNATE SCENARIOS At its February 2017 meeting, staff presented an earlier scenario with a 2% rate increase in FY 2018 followed by 6% rate increases in outer years. However, with the Operations reserve projected to be above the target level and well within the guideline levels adopted by Council, staff no longer sees the need for an increase at this time. SECTION 5G: LONG-TERM OUTLOOK In the longer term (5 to 35 years) the primary factor that could lead to increased costs for the Wastewater Collection Utility are major upgrades at the RWQCP, a share of which will be allocated to the utility as part of treatment costs. These upgrades includes replacement or rehabilitation of the parts of the facility that pump raw sewage to the main treatment works (the headworks), separate out primary sludge (the primary settling tank), process sludge (the bio-solids facility), and treat wastewater (the fixed film reactors). Upgrades to the laboratories and operational buildings are planned as well. In addition, the 72-inch regional trunk sewer line flowing into the plant needs to be evaluated and rehabilitated. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: WASTEWATER TREATMENT COSTS Treatment expenses represent the Wastewater Collection Utility’s share of the costs of operating the RWQCP. Per the partnership agreements between Palo Alto and its partner agencies, these charges are assessed based on a formula that takes into account the total amount of wastewater delivered, the amount of organic material in it, its ammonia content, and the total suspended solids it is carrying. The Wastewater Collection Utility’s assessed share of the RWQCP’s revenue requirement fluctuates in the 38% to 40% range. Mountain View is the other large agency served by the RWQCP (39% of the revenue requirement for FY 2014) with the smaller agencies (Stanford, Los Altos, East Palo Alto, and Los Altos Hills) making up the remainder of the flow to the treatment plant. Based on detailed project cost projections provided by RWQCP staff, treatment costs are likely to continue to increase by roughly 5% per year through at least 2030. Wastewater Treatment Fund costs are increasing due to rising salary and benefit costs as well as the attendant allocated charges for centralized city services needed by the Fund. Additional expenses include increased water and air permitting fees from the Regional Water Quality Control Board and the Bay Area Air Quality Management District. Commodity and utility rates to operate the facility are also increasing with the largest increases in FY2018 for electrical, water, refuse, and storm rates. Chemical commodity expenses, needed to adjust water quality and meet permit requirements, are also increasing modestly per latest chemical market conditions and procurement contract conditions. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 17 | Page Capital projects, parts, and materials are increasing about 3% to keep up with ongoing replacement of aging equipment. Larger increase to capital expenses are expected to begin in FY2020 in the form of new debt service for major projects to implement the Plant’s capital program. The Plant’s major project in FY2018 will be making progress constructing the Sludge Dewatering and Truck Loadout Facility, which will allow (in about 2019) the retirement of the Plant’s two sewage sludge incinerators that have been in operation since 1972. SECTION 6B: OPERATIONS Operations costs include the Customer Service, Distribution Operations, Engineering, and Allocated Charges categories in Appendix A: Wastewater Collection Financial Forecast Detail. Debt service, rent, and transfers are also included in this category. Customer Service costs are primarily related to the call center and collections on delinquent accounts. The Distribution Operations category includes preventative and corrective maintenance on sewer mains and laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the sewer system, and services shared with other utilities (such as street restoration and equipment maintenance). Allocated Charges include the costs of accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as shared communications services and Utilities Department administrative overhead and billing system maintenance costs. Operations costs are projected to increase by 3% per year, on average, over the forecast period. Underlying these projections are salary and benefit, consumer price index, and other cost projections used in the City’s long-range financial forecast. SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) The Wastewater Collection Utility’s CIP consists of the following programs: • The Sewer System Replacement/Rehabilitation Program, under which the Wastewater Collection Utility replaces aging sewer mains. • Customer Connections, which covers the cost when the Wastewater Collection Utility installs new services or upgrades existing services at a customer’s request in response to development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects. • Ongoing Projects, which covers the cost of replacing degraded manholes and sewer laterals, as well as the cost of capitalized tools and equipment. The Sewer System Replacement and Rehabilitation Program funds the replacement of deteriorating sewer mains and projects to increase capacity in various parts of the sewer system. The sewer system consists of over 217 miles of mains, and CPAU uses a variety of tools to establish which sections are in need of replacement. Maintenance statistics (such as records of the location and number of sewer overflows on the system) and videotape of sewer mains during regular cleaning can reveal areas with large amounts of deteriorating pipe. CPAU uses a WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 18 | Page scoring system to prioritize which mains to replace first, and coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. A major goal of the program is to minimize groundwater and rainwater infiltration. As mains deteriorate they begin to allow groundwater and rainwater to infiltrate the system. Some level of infiltration is expected on any sewer system, but if there is too much, the combined flow of wastewater and groundwater/rainwater can overwhelm the capacity of various parts of the sewer system. Reducing infiltration can reduce the need to expand the system to accommodate increased flow. To achieve this goal, deteriorating mains are either repaired with a plastic lining or replaced. CPAU replaces or repairs approximately 25,000 feet of main per year, or 2.5% of the system. The CIP program also funds sewer capacity improvements. CPAU uses a hydraulic model, data from various flow meters on the system, and land use data to identify sections of the system that are being overloaded. When sewer mains are operating at or above their capacity on a regular basis it will increase the likelihood of sewer overflows. CPAU also does occasional comprehensive master planning studies to identify necessary capacity improvements. The most recent study, in 2004, identified eight projects, three of which have been completed. The remaining four projects are low priority projects and will be scheduled and planned as the need arises. Over the last few years, main replacement costs have been increasing for Wastewater as well as the Gas and Water utilities. The replacement cost per linear foot has increased by between 25 and 50% in some cases. Several factors may be contributing to this. Economic recovery in the Bay Area, as well as a greater focus on infrastructure improvement by many municipal agencies and utilities could be creating high demand for contractors in this field. There may be ongoing greater costs for newer, more leak resistant pipe materials. Should these trends prove to be less than short-term phenomena, wastewater main replacement budgets may need to be increased by $1.5 to $1.7 million more per year to maintain the current pace of replacement. This increase in cost is a partial reason for the two year delay in projects. The most recent project, when put out for bid, resulted in very few contractors competing, and project bids larger than budgeted. Staff will redesign this and future projects into smaller segments to keep budgets lower, while not compromising on overall system integrity. The other reason for delay is the University Avenue Business District project, and getting coordination amongst all departments is taking more time than expected. Finally, there has been an ongoing issue with keeping and maintaining qualified staff to design and work on projects. Customer Connections costs are projected to increase steadily by around 3% each year through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective laterals and manholes are discovered during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of sewer laterals. It is worth noting that property owners pay a fee for sewer lateral replacement or expansion during redevelopment, so when the number of projects increases, so does fee revenue. Projected CIP spending is displayed in Table 10 for the 5-year financial forecast period. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 19 | Page Table 9: Projected CIP Spending Aside from Customer Connections, the CIP plan for FY 2018 to FY 2022 is funded by sewer rates and capacity fees. The details of the plan are shown in Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail. SECTION 6D: DEBT SERVICE The Wastewater Collection Utility currently pays its share of one bond issuance, the 1999 Utility Revenue Bonds, Series A, which is due to be retired in 2024. This $17.7 million issuance refinanced various earlier Storm Drain, Wastewater Treatment, and Wastewater Collection Utility bond issuances. The Wastewater Collection Utility’s share of the issuance was roughly $1.9 million. This amount represented the second refinancing of the remaining principal of a 1990 bond issuance which itself was a refinancing of a 1985 issuance that financed a variety of improvements to the sewer system. The cost of debt service for the Wastewater Collection Utility’s share of this bond issuance for the financial forecast period is roughly $128,000 per year as shown in Table 11 below. Table 10: Wastewater Collection Utility Debt Service ($000) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 1999 Utility Revenue Bonds, Series A 128 128 128 129 129 129 The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater Collection Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the City will maintain “Available Reserves”8 equal to five times the annual debt service. The current financial plan maintains compliance with both covenants throughout the forecast period. Compliance with covenant one is shown below in Table 12, below. Due to the small size of the annual debt service payment for these bonds, the Wastewater Collection Utility’s Operations Reserve alone more than satisfies the second covenant at more than 30 times annual debt service throughout the forecast period. 8 Available Reserves as defined in the 1999 Utility Revenue Bonds included reserves for the Water, Wastewater Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 20 | Page Table 11: Debt Service Coverage Ratio ($000) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Revenues 19,042 19,170 20,381 21,787 23,112 24,611 Expenses (Excl. CIP and Debt Service) -15,869 -16,146 -16,713 -17,709 -18,717 -19,343 Net Revenues 3,173 3,024 3,668 4,078 4,395 5,268 Debt Service 128 128 128 128 129 129 Coverage Ratio 2479% 2363% 2866% 3186% 3407% 4084% The Wastewater Collection Utility’s reserves (but not its net revenues) are also considered security for the Storm Drain and Wastewater Treatment Utilities’ shares of the debt service on the 1999 bonds. Throughout the term of the bonds there remains a small risk that the Wastewater Collection Utility’s reserves could be called upon to make a debt service payment on behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not foresee this occurring based on the current financial condition of those utilities. If the Wastewater Collection Utility’s reserves were used this way, any amounts advanced would have to be repaid by the borrowing utility. One other bond series is secured by the net revenues (but not the reserves) of the Wastewater Collection Utility. The 1995 Series A Utility Revenue Bonds issued for the Storm Drain utility was secured by the net revenues of the City’s “Enterprise,” which was defined as the City’s water, gas, wastewater, storm drain, and electric utilities, and are senior to the 1999 bonds referenced above. Debt service payments of roughly $680,000 per year are made on the 1995 Series A bonds by the City’s Storm Drain Utility, and staff does not currently foresee any risk of that utility being unable to make payment. SECTION 6E: OTHER REVENUES The utility has seen substantial increases in connection and capacity fee revenues in recent years, offsetting the need for increased sales revenue in the past, and these are assumed to continue, albeit slightly reduced from current levels. Income from interest and transfers in are projected to remain steady through the forecast horizon. SECTION 7: COMMUNICATIONS PLAN The FY 2017 Wastewater Collection Utility communications strategy covers three primary areas: rates, maintenance and operations, and safety. Communication about wastewater rate adjustments will highlight the important infrastructure and operations upgrades that are occurring at the Regional Water Quality Control Plant to improve wastewater collection utility services. To keep customers apprised of the status and accomplishments of CIP projects, a network of project web pages are maintained and updated as needed. Traffic is driven to the website via ads in newspapers and local publications, utility bill inserts, social media and email newsletters. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 21 | Page An important communications topic for the wastewater utility is avoiding sewer back-ups due to FOG (fats, oil and grease) and trash being dumped down drains and toilets. Safety topics are emphasized year-round. Staff continues its outreach goal of educating customers about the utility’s gas-sewer line cross-bore inspection program, including the importance of calling Utilities prior to clearing sewer lines in the event of a sewer back-up. Promotional activity about wastewater utility maintenance and safety operations includes use of bill inserts, ads in local print publications, website pages, email newsletters and social media. While print materials and website pages feature prominently, CPAU is increasing the outreach emphasis on more direct communication with customers, including through use of social media, email newsletters, digital ads, videos and short commercials on the local television channels. Staff is also attending more community safety/emergency preparation events and neighborhood meetings. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 22 | Page APPENDICES Appendix A: Wastewater Collection Financial Forecast Detail Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail Appendix C: Wastewater Collection Utility Reserves Management Practices Appendix D: Sample of Wastewater Collection Outreach Materials WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 23 | Page APPENDIX A: WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 24 | Page APPENDIX B: WASTEWATER COLLECTION UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 25 | Page APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Wastewater Collection Utility Financial Plan: Section 1. Definitions a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal years covered by the Financial Plan. For example, if the Financial Plan delivered in conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015 to FY 2019 would be the Financial Planning Period. b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers to the Utility’s Unrestricted Net Assets. c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets as the difference between its assets and liabilities. d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital assets (net of related debt) or restricted for debt service or other restricted purposes. Section 2. Reserves The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 3 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Wastewater Collection Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 7 (Operations Reserve) f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayers or assigned a specific purpose as described in Section 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Wastewater Collection Utility at that time. Section 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re- appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 26 | Page Section 5. CIP Reserve The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff will manage the CIP Reserve according to the following practices: a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of CIP expense budgeted for that year. Minimum Level 12 months of budgeted CIP expense Maximum Level 24 months of budgeted CIP expense b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to that reserve as a result of a change in contractual commitments related to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action. c) Minimum Level: i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve for the purpose of determining compliance with the CIP Reserve minimum guideline level. ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end of the following fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is below its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve, or that does so in a shorter period of time. d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds may be added to this reserve. If there are funds in this reserve in excess of the maximum level staff must propose to transfer these funds to another reserve or return them to ratepayers in the next Financial Plan. Staff may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. Rate Stabilization Reserve Funds may be added to the Rate Stabilization Reserve by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Wastewater Collection Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 27 | Page Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage the Operations Reserve according to the following practices: a) The following guideline levels are set forth for the Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operations and Maintenance (O&M) and commodity expense forecasted for that year in the Financial Plan. Minimum Level 60 days of O&M and commodity expense Target Level 105 days of O&M and commodity expense Maximum Level 150 days of O&M and commodity expense b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. For example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve. c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Wastewater Collection Utility shall be designed to return the Operations Reserve to its target level within four years. d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Wastewater Collection Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Wastewater Collection Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Wastewater Collection Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2016 28 | Page APPENDIX D: SAMPLE OF WASTEWATER COLLECTION OUTREACH MATERIALS Attachment C EXCERPTED DRAFT MINUTES OF THE MARCH 1, 2017 UTILITIES ADVISORY COMMISSION ITEM 4. ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend that the City Council Adopt: (1) a Resolution Approving the Fiscal Year 2018 Wastewater Collection Financial Plan Acting Senior Resource Planner Eric Keniston presented on the Wastewater Collection Financial Plan. He said no rate increase was proposed for the Wastewater Collection Utility. Wastewater collection capital investment was projected to increase in the future, and wastewater treatment capital investment and operating costs were projected to increase in the future. Commissioner Trumbull noted citizens were voting for a parcel tax to extend the storm drain. He asked whether that was reflected in the summary of all rate increases shown in the staff presentation, and what the impact to residential rates would be if the parcel tax were not approved. Keniston said that the numbers were provided for context, but staff did not have information on hand to address the storm drain rate changes. Assistant Director of Resource Management Jonathan Abendschein said the ballot for the parcel tax would be the best source of information. Commissioner Schwartz asked about basement dewatering. The water went to the storm drain. She asked whether the storm drain parcel tax was linked to the issue of basement dewatering. Utilities Director Ed Shikada said the two issues were not linked. Commissioner Danaher said the issue had been discussed at a prior meeting. ACTION: Commissioner Schwartz moved, seconded by Commissioner Ballantine to recommend that the City Council adopt the staff recommendation. The motion carried unanimously (6-0, with Vice Chair Danaher and Commissioners Trumbull, Forssell, Danaher, Schwartz, Ballantine, and Johnston voting yes and Commissioner Cook absent).