Loading...
HomeMy WebLinkAbout2019-03-19 Finance Committee Agenda PacketFinance Committee 1 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Tuesday, March 19, 2019 Special Meeting Community Meeting Room 5:30 PM Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in the Council Chambers on the Thursday 12 days preceding the meeting. PUBLIC COMMENT Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card located on the table at the entrance to the Council Chambers/Community Meeting Room, and deliver it to the Clerk prior to discussion of the item. You are not required to give your name on the speaker card in order to speak to the Committee, but it is very helpful. Public comment may be addressed to the full Finance Committee via email at City.Council@cityofpaloalto.org. Call to Order Oral Communications Members of the public may speak to any item NOT on the agenda. Action Items 1. Preliminary Financial Forecasts and Rate Changes for Wastewater Collection and Water Utilities for Fiscal Year 2020 2. Approval of the 2019 Workplan to Address the City Council Priority, “Fiscal Sustainability” and Update Regarding the Fiscal Year (FY) 2019 Adopted Budget Referral to Identify $4 Million in General Fund Savings Future Meetings and Agendas Adjournment AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. 2 March 19, 2019 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Finance Committee Items to be Scheduled Tentative Meeting Date Line No. Item Title Referral Date April 2 5:30pm 1 FY2020 Preliminary Electric and Gas Forecasts - Utilities 2 FY2019/20 – CDBG Allocations - Planning 3 April 16 5:30pm 4 3rd Quarter Financials - Administrative Services Department 5 Adoption of a Resolution Amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage) Increasing the Storm Water Management Fee by 4.5 Percent to $14.68 Per Month Per Equivalent Residential Unit for Fiscal Year 2020 - Public Works 6 FY2020 Water Financial Plan and Rate Proposals - Utilities 7 FY2020 Wastewater Collection Financial Plan and Rate Proposals - Utilities May 14 & 15 9am - 5pm 8 FY 2020 Electric Financial Plan and Rate Proposals - Utilities 9 FY 2020 Gas Financial Plan and Rate Proposals - Utilities 10 FY 2020 PROPOSED Operating/Capital Budgets - Utilities 11 FY 2020 Municipal Fee Hearings - (ASD) 12 Review recommended workplan for in-depth Municipal Fee review, follow-up from 2018 (ASD) May 21 1pm - 5pm 13 FY 2020 Budget Wrap-up (ASD) City of Palo Alto (ID # 10151) Finance Committee Staff Report Report Type: Action Items Meeting Date: 3/19/2019 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: FY 2020 Preliminary Water and Wastewater Rates Title: Preliminary Financial Forecasts and Rate Changes for Wastewater Collection and Water Utilities for Fiscal Year 2020 From: City Manager Lead Department: Utilities Recommendation This item is for discussion and no action is requested. Staff will use input from the Finance Committee on its preliminary rate projections for the Wastewater Collection and Water utilities to finalize its recommended FY 2020 Wastewater Collection and Water Financial Plans and proposed rate changes. Preliminary rate projections for the Electric and Gas utilities will be presented in April. Executive Summary The attached presentation describes staff’s preliminary rate projections for the Wastewater Collection and Water Utilities. A similar presentation was provided to the Utilities Advisory Commission (UAC) at its February 6, 2019 meeting. Staff’s preliminary retail rate forecast over the next five fiscal years is shown in the table below, along with the overall impact to the median residential bill. The rate changes shown are preliminary estimates. Actual rate changes will be based on updated financial data and the cost of service methodologies and studies for each utility, and may differ by customer class and for individual customers depending on consumption patterns. Updated cost of service studies for Water and Gas are nearing completion and will be factored into Staff proposals for FY 2020. City of Palo Alto Page 2 Table 1: Projected Rate Increases – All Utilities Staff seeks input from the Finance Committee prior to finalizing the Utilities Financial Plans and developing recommendations for rate changes that would be effective July 1, 2019. The proposed rate adjustment recommendations, along with each utility’s Financial Plans, are currently scheduled to be presented to the Finance Committee in April for the Water and Wastewater Collection Utilities, and in May for the Electric and Gas Utilities. As new information may still come in, it is possible that the final rate proposals presented to the Finance Committee and Council may vary from what is provided here. Background Every year staff presents the UAC and Finance Committee with financial forecasts for the Electric, Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments required to maintain their financial health. These forecasts are memorialized in Financial Plans that comprehensively discuss the outlook for each utility. Before providing recommended Financial Plans and rate changes, staff typically presents a preliminary forecast to get early feedback. As reference, the current year (FY 2019) financial plan for the wastewater collection utility is available at: https://www.cityofpaloalto.org/civicax/filebank/documents/64245 And the current year (FY 2019) financial plan for the water utility is available at: https://www.cityofpaloalto.org/civicax/filebank/documents/64557 Commission Review The UAC reviewed the preliminary financial forecasts at its February 6, 2019 meeting. No recommendation was requested at that meeting, but staff sought input from Commissioners before finalizing the Financial Plans and rate adjustment recommendations. Commissioners had no recommendations as to different rate increase paths. The draft minutes from the UAC’s February 6, 2019 meeting are provided as Attachment B. City of Palo Alto Page 3 Next Steps The UAC is scheduled to review the long-term Financial Plans and proposed rate adjustments for the Wastewater Collection Utility in March and the Electric, Gas and Water Utilities in April. The Finance Committee is tentatively scheduled to review the long-term Financial Plans and proposed rate adjustments in April (for the Water and Wastewater Collection Utilities) and in May (for the Electric and Gas Utilities). Once the Finance Committee has provided its recommendation, notification of any recommended Water, and Wastewater Collection rate increases will be sent to customers giving them the opportunity to protest the proposed changes as required by Article XIIID of the State Constitution (added by Proposition 218). The Financial Plans and proposed new rate schedules will be considered by the City Council with the FY 2020 budget, at which time the public hearing required by Article XIIID of the State Constitution will be held. Environmental Review The Finance Committee’s review of the preliminary financial projections does not meet the definition of a project, pursuant to Section 21065 of the California Environmental Quality Act, thus no environmental Resource Impact The FY 2020 Budget is being developed concurrent with these rates. Depending on final rates, adjustments may be necessary in the FY 2020 Budget at a later time. As these figures are preliminary and subject to change, it is premature to discuss possible resource impacts at this time. However, resource impacts will be discussed in the final plans to be presented in April, as well as the impacts of any agreed upon alternatives that arise from this meeting. Attachments: • Attachment A: Preliminary Water and Wastewater Financial Forecasts • Attachment B: Excerpted Draft UAC Minutes of February 6, 2019 1 Preliminary Rate Changes for Electric, Gas, Wa stewater Collection, and Water Utilities for FY2020 Finance Committee March 5, 2019 ATTACHMENT A 2 Financial Forecast Summary §Review four funds: Electric, Gas, Water and Wastewater Collection §Refuse rate projections included for information §Review of Financial Reserves §Staff projects need for Electric, Gas, Water,and Wastewater Collection rate increases for FY 2020 §Communication plan being prepared §Gas and Water Cost of Service (COSA) updates to be completed this year §Wastewater COSA update to be completed next year 3 FY 2019 Rate Projections FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Electric Utility 6%3%2%0%1% Gas Utility1 4%8%7%6%5% Wastewater 11%12%10%6%4% Water Utility 3%4%4%4%4% Refuse -3%3%3%3% Storm Drain2 2.9%2%to3%2%to3%2%to3%2%to3% Bill Change3 (%)4%5%5%4%3% ($/mo)$11 $15 $14 $11 $11 (1)Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary monthly with wholesale market fluctuations (2) Storm Drain Rates increase annually by CPI (3) Median residential bill is $273.56 as of July 1, 2017 (does not include UUT) 4 FY 2020 Rate Projections FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Electric Utility 9%3%-5%3%-5%3%-5%3%-5% Gas Utility 10%10%10%2%-3%2%-3% Wastewater 7%8%8%8%8% Water Utility 4%3%4%5%5% Refuse -3%3%3%3% Storm Drain 4.5%2%-3%2%-3%2%-3%2%-3% Bill Change (%)5%5%5%4%4% ($/mo)$15 $14 $15 $14 $13 •Rate increases to bring Operations Reserves to Target level by FY 2024 (five years) •Slight increases due to reduced sales volumes, most notably in electric 5 Ongoing Cost Containment §Consistent with newly approved Utilities Strategic Plan, cost containment is being instituted as an ongoing priority and annual cycle –Fall completion of preliminary out-year rate forecasts –Review by all Divisions for alignment of multiyear strategies §Ongoing management review of personnel actions –Review/revision of position classifications to match evolving needs –Add/Deletion of positions to reflect organizational priorities –Review/approval to fill individual position vacancies in conjunction with ASD Budget Office and Human Resources §Regular review of performance metrics and expenditures 6 Cost Containment Examples §Recently implemented cost control measures: –Gas prepay arrangement for discounted gas (~1M/yr) –Cost savings for gas transmission due to regulatory advocacy (~$250K/yr) –Electric transmission savings due to regulatory advocacy (~$1M/year) –Successfully negotiated with vendor to reduce change request costs for new customer portal (estimated savings of $40k-$100k) –Reduced SAP consultant spending due to process reengineering or developing alternative solutions (estimated savings of $50k) §Potential future cost control measures: –Explore outsourcing hedging and risk management –Enter into prepay deals for existing renewables to reduce costs –Rebalance electric portfolio to reduce cost while maintaining compliance with State mandates and local sustainability goals –Explore ways to reduce merchant fee costs for credit card transactions –Explore potential savings in utility bill printing through paperless billing and reducing printing charges –Switch to new customer information system with reduced support costs 7 Wa stewater Utility 8 Wa stewater Projections §FY 2020 proposal: –7% overall rate increase §Future projections –8% per year increases following four years Wastewater Utility 9 Wastewater Utility Basics Wastewater Utility •Five partners: Stanford, East Palo Alto, Los Altos Hills, Lost Altos, and Mountain View •Wastewater drains from partner systems through the City of Palo Alto Collection System, and into the City of Palo Alto Regional Water Quality Control Plant (RWQCP) for treatment •City of Palo Alto Utilities Department manages collection system, Public Works manages the RWQCP. 10 Wastewater Utility Cost StructureWastewater Utility Palo Alto’s share of the cost to treat sewage at Palo Alto’s Regional Water Quality Control Plant Cost to collect sewage within Palo Alto, including: maintaining and replacing sewer infrastructure, customer service, billing, administration, etc. Tr eatment $11.0 million 48% Collection $11.9 million 52% Treatment Collection 11 - 5 10 15 20 25 30 FY 2016 FY 2019 (Budget)Fy 2024 (Projected) $ (Millions) Collection Treatment Long-term Cost TrendsWastewater Utility Treatment: 7.8%/yr Collection: 4.5%/yr Annualized Increase, FY16-FY19: Annualized Increase, FY19-FY24: Treatment: 6.1%/yr Collection: 0.9%/yr 12 - 2 4 6 8 10 12 14 16 FY 2016 FY 2019 (Budget)Fy 2024 (Projected) $ (Millions) Treatment Debt service Treatment Operations Tr eatment Cost ForecastWastewater Utility Treatment Operations: 9%/yr Treatment Debt Service: 3%/yr Annualized Increase, FY16-FY19: Annualized Increase, FY20-FY24: Treatment Operations: 4%/yr Tr eatment Debt Service: 17%/yr •Regional Water Quality Control Plant needs rehabilitation •Long Range Facilities Plan completed in 2012 •Rehab / replacement of: –Fixed film reactors ($10.7M) –Headworks facility ($39.1M) –Outfall pipe ($7.5M) –Plant equipment ($5.1M) –Sedimentation tank ($7.5M) –Secondary treatment ($30.6M) •Approximately $100M total Treatment Cost Drivers 14 - 5 10 15 20 25 30 FY 2016 FY 2019 (Budget)Fy 2024 (Projected) $ (Millions) Collection Treatment Long-term Cost TrendsWastewater Utility Treatment: 7.8%/yr Collection: 4.5%/yr Annualized Increase, FY16-FY19: Annualized Increase, FY20-FY24: Treatment: 6.1%/yr Collection: 0.9%/yr 15 Collection costsWastewater Utility Debt Service $0.1 million 1% Operations $5.5 million 47% Capital Investment $6.2 million 52% Debt Service Operations Capital Investment 16 - 2 4 6 8 10 12 14 FY 2016 FY 2019 (Budget)Fy 2024 (Projected) $ (Millions) Debt Service Operations Capital Investment Collection Cost Trends Collection System Capital: 7.7%/yr Operations: 1.4%/yr Annualized Increase, FY16-FY19: Debt Service: 0.0%/yr Annualized Increase, FY20-FY24: Collection System Capital: No change* Operations: 2.5%/yr Debt Service: eliminated Wastewater Utility *Note: FY 2019 collection capital spending is unusually high due to the Upgrade Downtown project. Costs decrease in FY 2021, then increase from FY 2021 to FY 2024 about 3%/yr, resulting in FY 2024 capital spending matching FY 2019 •Health, retirement, and associated overhead costs continue to increase •Underground construction costs have increased substantially as well Operations and Capital Cost Drivers 18 Underground Construction Costs 0 100 200 300 400 500 600 2008 2010 2012 2014 2016 2018 2020 Water ($/FT)Gas ($/FT)Elec U/G ($/FT)Sewer ($/FT) Wastewater Utility 19 Median Monthly Residential Bill Palo Alto is 29% below comparison city average Wastewater Utility Palo Alto Neighboring Communities Neighboring Community Average Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 38.66 93.83 78.24 42.91 40.80 37.36 32.85 54.33 Based on rates as of February 2019 20 Five-Ye ar Rate Tr ends 80.00 85.00 90.00 95.00 100.00 105.00 110.00 115.00 120.00 125.00 130.00 2014 2015 2016 2017 2018 Palo Alto (4.4%/yr) Comparison City Average (5.9%/yr) CPI-U (SF Bay Area) (3.2%/yr) CPI, Water/Wastewater, National (3.8%/yr) Wastewater Utility 21 0 5 10 15 20 25 FY 2019 (Projected)FY 2020 (Projected) $ (Millions) Debt Service Operations Capital - Ongoing Treatment FY 2020 Projected Cost Changes Tr eatment: $0.7M increase Operations: $0.2M increase Total Cost: 1% increase Ongoing Capital: $0.6M decrease Wastewater Utility 22 Drivers of FY 2020 Cost Changes §Treatment spending increase –Discussed in earlier slides, but mainly driven by ongoing renovation projects §CIP spending decrease: –Preliminary budget proposals for FY 2020 include reduced spending on •Wastewater main replacements –WC-16001 –Project 29 -$740k reduction – –Smaller project size than FY 19 project 28 (14k linear feet vs 22k linear feet) §Operations cost increase: –Increases in salary and benefit costs for existing staff. No staff additions. –Inflationary increases in non-salary costs Wastewater Utility 23 FY 2020 Revenue at Current Rates 0 5 10 15 20 25 FY 2019 (projected)FY 2020 (projected) $ (Millions) Costs Rate revenue Other Revenue Rate Revenue: 7% increase To tal Revenue: 90% of ongoing costs To tal Revenue: 95% of ongoing costs Wastewater Utility 24 Wastewater Projections 25 Operations Reserve Impact of Proposed Rate Plan 0 1 2 3 4 5 6 7 8 YE FY 2019 (projected)YE FY 2020 (projected) $ (Millions) Operations Reserve Min Guideline Target Max Guideline Wastewater Utility 26 Wastewater Projections 27 Wa stewater Projections §FY 2020 proposal: –7% overall rate increase §Future projections –8% per year increases following four years Wastewater Utility 28 Water Utility 29 Water Projections §FY 2020 proposal: –4% overall rate increase §FY 2020 Rate Design Changes: –Te ntatively planning to creating a separate commodity rate component for pass-through –Recommending merging of some residential meter charges §Future projections –3% to 4% increases next three years –Higher increases starting in FY 2023 as SFPUC supply costs begin to rise again Water Utility 30 Basics of Palo Alto’s Water System Water Utility Water Supply from Sierras (SFPUC’s Hetch Hetchy system) Water Distribution in Palo AltoWater Distribution in Palo Alto 31 Wa ter Utility Cost StructureWater Utility Cost to bring the water to Palo Alto Cost to distribute water within Palo Alto, including: maintaining and replacing water infrastructure, customer service, billing, administration, etc. Supply $22.5 million 39% Distribution $35.1 million 61% Supply Distribution 32 Long-term Cost TrendsWater Utility - 10 20 30 40 50 60 70 FY 2014 FY 2018 Fy 2024 (Projected) $ (Millions) Distribution Supply Supply: 8.7%/yr Distribution: 1.0%/yr Annualized Increase, FY14-FY18: Annualized Increase, FY19-FY24: Supply: 2.5%/yr Distribution: 4.2%/yr •Water System Improvement Project (WSIP) a major driver •2002: advocacy by wholesale customers results in AB 1823 requiring SFPUC to adopt and implement the WSIP •In 2010 construction began - $4.8B, one of the largest water projects in the nation •Level of service goal: return to service in 24 hours after an earthquake Water Supply Cost Drivers •WSIP spending 96% complete as of Jan 2019 •“Upcountry” system in the Sierras still needs work. •Wholesale customers (via BAWSCA) advocating for long- term capital plan •Necessary and improves reliability, but supply costs will increases in the future as a result Water Supply Cost Drivers 35 Wa ter Supply Rate Forecast Water Utility Rates w/o Balancing Account Refund SFPUC rates are artificially low due to a refund of wholesale revenue over- collected in previous years. Refund will be delivered from FY 2020 to FY 2023 36 Long-term Cost TrendsWater Utility - 10 20 30 40 50 60 70 FY 2014 FY 2018 Fy 2024 (Projected) $ (Millions) Distribution Supply Supply: 8.7%/yr Distribution: 1.0%/yr Annualized Increase, FY14-FY18: Annualized Increase, FY19-FY24: Supply: 2.5%/yr Distribution: 4.2%/yr 37 Distribution costs Water Utility Debt Service $3.2 million 9% Operations $13.6 million 39% Capital Investment $18.3 million 52% Debt Service Operations Capital Investment 38 - 5 10 15 20 25 30 35 FY 2014 FY 2018 Fy 2024 (Projected) $ (Millions) Debt Service Operations Capital Investment Distribution Cost Trends Water Utility Capital: 0.5%/yr Operations: 2.1%/yr Annualized Increase, FY14-FY18: Debt Service: 0.0%/yr Annualized Increase, FY19-FY24: Capital: 5.5%/yr Operations: 3.8%/yr Debt Service: 2.9%/yr •Health, retirement, and associated overhead costs continue to increase •Underground construction costs have increased substantially as well •There is a planned increase in costs within the five year forecast period for generator backup at pumping stations Operations Cost Drivers •Construction costs have increased substantially •Large one-time costs related to emergency water supply and reservoir rehabilitation Capital Cost Drivers 41 Underground Construction Costs Water Utility 0 100 200 300 400 500 600 2008 2010 2012 2014 2016 2018 2020 $/Foot Water ($/FT)Gas ($/FT)Elec U/G ($/FT)Sewer ($/FT) 42 Monthly Residential Bill Water Utility - 20 40 60 80 100 120 140 160 180 200 Palo Alto Redwood City Menlo Park Mountain View Hayward Santa Clara Monthly Bill ($) Low (4 CCF)Med (8 CCF)High (18 CCF)Average (8 CCF) Palo Alto is 12% above comparison city average 43 The Impact of Capital Investment §Sustainable capital investment plays a large part in Palo Alto’s higher costs §Palo Alto has an 80 year replacement cycle, while other cities are on a 200 to 300 year cycle if they maintain their current rates of replacement 44 Other Factors Driving Palo Alto’s Higher Costs §Palo Alto built infrastructure to serve planned development in the Foothills that never occurred. §This drives higher costs due to long drive times to manage water quality and maintenance for the pumps and reservoirs up in the Foothills. §In addition, Palo Alto’s emergency water supply system relies more on reservoirs than wells, which is more expensive. §Long-term cost containment strategies could include: 1.Reducing the number of reservoirs in the Foothills. Currently studying this alternative since the reservoirs need replacement. 2.Install sensors and water quality devices at higher elevation reservoirs to minimize maintenance trips 3.Re-examine cost allocations for customers in the Foothills. For example, East Bay MUD charges an elevation surcharge that results in rates 10% to 40% higher for customers at higher elevations. 45 Five-Ye ar Rate Tr ends Water Utility 80.00 90.00 100.00 110.00 120.00 130.00 140.00 150.00 2014 2015 2016 2017 2018 Palo Alto (6.5%/yr) Comparison City Average (9.3%/yr) CPI-U (SF Bay Area) (3.2%/yr) CPI, Water/Wastewater, National (3.8%/yr) 46 FY 2020 Projected Cost Changes Supply: $0.3M decrease Operations: $1.8M increase One-time Capital: $5.5M decrease To tal Cost: 19% decrease Ongoing Capital: $7.0M decrease* Debt Service: No change Water Utility 47 Drivers of FY 2020 Cost Changes §CIP spending decrease: –Preliminary budget proposals for FY 2020 include reduced spending on •Water meter replacements –WS-80015 -$385k reduction – –Sample testing to occur on meters to determine replacement, rather than blanket replacement based on age –Budget needs could increase based upon results of sampling •General distribution system improvements –WS-11003 -$240k reduction –Activity on this CIP has not been as large as originally anticipated, thus the reduction. §Operations cost increase: –Increases in salary and benefit costs for existing staff. No staff additions. –Inflationary increases in non-salary costs –Addition of $1 million for backup generators at pump stations in FY 2020 –Evaluation still underway, may be pushed to FY 2021 §Supply cost decrease –Projected decrease in water sales in line with long-term trends –Supply cost decreases are matched by revenue decreases Water Utility 48 FY 2020 Revenue at Current Rates Water Utility 0 10 20 30 40 50 60 70 FY 2019 (projected)FY 2020 (projected) $ (Millions) Costs One-Time CIP Rate revenue Other Revenue Rate Revenue: 4% increase To tal Revenue: 97% of ongoing costs To tal Revenue: 99% at ongoing costs (using FY19) 49 Wa ter Projections 50 Operations Reserve Impact of Proposed Rate Plan Water Utility 0 2 4 6 8 10 12 14 16 18 YE FY 2019 (projected)YE FY 2020 (projected) $ (Millions) Operations Reserve Min Guideline Target Max Guideline 51 Water Rate Proposal §FY 2020 proposal: –4% overall rate increase §FY 2020 Rate Design Changes: –Te ntatively planning to creating a separate commodity rate component for pass-through –Evaluating merging of some meter charges §Future projections –3% to 4% increases next three years –Higher increases starting in FY 2023 as SFPUC supply costs begin to rise again Water Utility 52 FY 2020 Rate Projections FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Electric Utility 9%3%-5%3%-5%3%-5%3%-5% Gas Utility 10%10%10%2%-3%2%-3% Wastewater 7%8%8%8%8% Water Utility 4%3%4%5%5% Refuse -3%3%3%3% Storm Drain 4.5%2%-3%2%-3%2%-3%2%-3% Bill Change (%)5%5%5%4%4% ($/mo)$15 $14 $15 $14 $13 •Rate increases to bring Operations Reserves to Target level by FY 2024 (five years) •Slight increases due to reduced sales volumes, most notably in electric 53 Preliminary Rate Changes for Electric, Gas, Wa stewater Collection, and Water Utilities for FY2020 Finance Committee March 5, 2019 Utilities Advisory Commission Minutes Approved on: Page 1 of 3 UTILITIES ADVISORY COMMISSION MEETING EXCERPTED DRAFT MINUTES OF FEBRUARY 6, 2019 REGULAR MEETING ITEM 4: DISCUSSION: Staff Presentation on Preliminary Rate Changes for Electric, Gas, Wastewater Collection, and Water Utilities for FY 2020. Eric Keniston, Senior Resource Planner, noted the projections include refuse rates for information only. Staff will complete gas and water cost of service adjustment (COSA) updates in 2019, and wastewater COSA updates are planned for 2020. Staff projected a 5-percent overall residential rate increase for fiscal year 2019. The projection has changed based on ending reserves for FY 2018. For FY 2020, staff projects a 9-percent rate increase for electric, a 10-percent increase for gas, a 7-percent increase for wastewater, a 4-percent increase for water, and no increase for refuse. Jonathan Abendschein, Assistant Director of Resource Management, recalled staff talking with the Finance Committee about ways to contain costs in each budget cycle without sacrificing service. Staff has advanced the preliminary rate forecast so that division heads can understand the rate outlook for the next year and focus their efforts on efficiencies prior to submitting their proposed budgets. In addition, staff continues to review personnel actions in order to operate efficiently and handle vacancy issues and to regularly review performance metrics and expenditures. Keniston further reported the Supply Operations Reserve balance is currently below the minimum guideline. Staff can utilize the Hydroelectric Stabilization Reserve or the Special Projects Reserve to raise the balance above the minimum guideline. Staff projects 3-5 percent rate increases beyond FY 2020. All utilities are facing declining sales as usage moves into the historical long-term decline. The Distribution Operations Reserve balance is projected to remain around the minimum guideline and increase over time. In reply to Chair Danaher's query about increasing the Supply Operations Reserve balance by $20 million over the next few years, Keniston indicated that is staff's intent. In response to Commissioner Johnston's questions about the reason the projection jumped from 3 to 9 percent, Keniston explained the increases in electric commodity costs and capital project costs caused the projection to increase. When sales decrease, rate increases are spread over fewer and fewer units. Within the projection for gas rates, a 15-percent distribution rate increase equates to about a 10-percent overall bill impact. The projection increased based on plans to resume annual water main replacement projects, cross- bore contingency costs, and regional backbone transportation cost increases. In answer to Vice Chair Schwartz's inquiry about the effect of PG&E seeking bankruptcy protection or selling its gas operation, Abendschein indicated staff continues to explore the possibilities. Staff is less concerned about CPAU's direct exposure and more concerned about indirect exposure such as loss of privileges on the transmission pipeline or PG&E passing costs via the transmission access charge. The Northern California Power Agency (NCPA) is assisting staff with a response on that front. Keniston continued the presentation, stating Electric Utility revenues are below costs and projected costs; therefore, 10-percent rate increases will be needed for the next two or three years. With the rate increase, ATTACHMENT B Utilities Advisory Commission Minutes Approved on: Page 2 of 3 the Operations Reserve balance will fall within the minimum and maximum guidelines. The minimum guideline level is $6 million, so the Operations Reserve will provide only a small cushion. For wastewater, staff proposes a 7-percent rate increase. Staff anticipates an increased amount of capital work on the Palo Alto distribution system and the Water Quality Control Plant (WQCP). Wastewater collection does not have much debt service, but most of the WQCP capital expense will be related to debt service. Operations Reserves are small and will draw down quickly such that staff expects the balance will reach the minimum guideline balance by FY 2022. A 7-8 percent increase will cause a $2.50-$3.00 per month bill impact. Staff proposes a 4-percent overall water rate increase and plans to create a separate commodity rate component for pass- through. This is a good time for a separate component as the SFPUC does not appear to be planning rate increases until 2022 or 2023. In the water COSA, staff is evaluating a merger of all residential meter charges into one charge for all residential customers. Currently, SFPUC has a $4 billion project for seismic improvements to the Hetch Hetchy system. In future years, many capital improvements will be needed. The cost of water accounts for about 40 percent of the utility's costs. From 2014-2024, staff projects average overall 4-percent cost increases. Capital investments account for slightly more than 50 percent of distribution-related costs. Over the last five years, distribution costs have been increasing slowly, but staff believes they will increase faster to 2024. If a project to install backup generators at pumping stations does not materialize, near-term costs could decrease. The cost of underground construction has increased precipitously since 2010. Palo Alto's median bill is approximately 12 percent higher than the average bill of comparable cities. Chair Danaher commented that a comparison of median monthly residential bills is not meaningful if lots and yards vary greatly in size. A comparison based on cost per cubic foot could be more meaningful. Commissioner Forssell interpreted the chart as a comparison of bills for usage of 4 ccf, 8 ccf, and 18 ccf. Keniston further reported water costs increased due to reservoir infrastructure in the Foothills. Cost containment strategies could include reducing the number of reservoirs in the Foothills or instituting an elevation surcharge. In response to Vice Chair Schwartz's query about reallocating some of those resources to fire prevention, Keniston advised staff does allocate a portion of costs to fire protection rates and can consider allocations to other funds. Keniston continued the presentation, stating over the last five years, rates have increased on average 6.5 percent per year. Rates for comparable cities have increased by 9 percent per year. For FY 2020, CPAU will probably have an 8-percent cost decrease due to one-time capital decreases. If other revenues such as interest income or capacity fees decrease, staff may have to increase rates more. Staff anticipates overall costs will decrease slightly over the next few years. When the SFPUC rate increases take effect, CPAU's costs will begin to rise. The Operations Reserve balance currently falls well within the minimum and maximum guidelines. In response to Chair Danaher's question regarding UAC action on rate proposals, Keniston explained the Proposition 218 notice requirement for water and wastewater rates. Staff will present the water and wastewater rate proposals to the UAC in March and the Finance Committee in April. Electric and gas rates will be presented in the next two to three months. Commissioner Johnston recommended staff communicate the cost drivers for rate increases to the Finance Committee. Vice Chair Schwartz suggested staff also illustrate the fixed costs versus variable costs based on usage. In reply to her question about the concentration of EVs in Palo Alto not affecting electric revenue, Keniston reported EVs do not use a lot of energy on a kilowatt per hour (kW h) basis. EVs do create demand issues, which could drive up costs because of the need to replace transformers. The increase in residential usage has been countered with a decrease in commercial usage of electricity. Utilities Advisory Commission Minutes Approved on: Page 3 of 3 Chair Danaher agreed with Vice Chair Schwartz's point about illustrating costs. He commended staff for including the overall percentages, cost containments, and the chart showing the cost of undergrounding. CPAU should have a list of capital projects it can accelerate if staff anticipates a recession such that costs might decrease. ACTION: None NEXT SCHEDULED MEETING: March 6, 2019 Meeting adjourned at 9:31 p.m. Respectfully Submitted Tabatha Boatwright City of Palo Alto Utilities City of Palo Alto (ID # 10179) Finance Committee Staff Report Report Type: Action Items Meeting Date: 3/19/2019 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: 2019 Fiscal Sustainability Workplan & $4 million FY 2019 Budget Referral Update Title: Approval of the 2019 Workplan to Address the City Council Priority, “Fiscal Sustainability” and Update Regarding the FY 2019 Adopted Budget Referral to Identify $4 Million in General Fund Savings From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Finance Committee recommend that City Council approve the 2019 workplan to address the City Council Priority “Fiscal Sustainability” and discuss the status of the Fiscal Year 2019 Adopted Budget referral to identify $4.0 million in General Fund structural reductions including identification of implications to non-general funds and direct staff to proceed with the workplan. Background As part of the adoption of the Fiscal Year (FY) 2019 Budget, the City Council directed staff to: Return to the Finance Committee with a work plan and timeline to discuss the $4 million in structural reductions in the General Fund and the impacts of the reduction in expenses when the City Council returns from break, including a discussion of optimizing library hours. Also include discussion regarding the implications of closing the pension gap, at a commensurate 50% level to the General Fund, accounting for rising costs in non-general funds, specifically Enterprise and Other Funds. Staff developed two plans to address this referral: 1) “immediate action” and 2) “strategic action.” Ultimately, the Finance Committee and City Council approved the report and directed staff to complete both workplans. The Finance Committee and City Council completed the immediate action item in December 2018 with the approval of budget adjustments to the FY 2019 budget (CMR 9925). This action included the approval of an additional $4 million City of Palo Alto Page 2 contribution to the City’s IRS section 115 irrevocable pension trust fund. This report provides a brief update on the status of the second longer term plan for strategic action. Subsequent to this referral and the approval of the plans to address it, the City Council met on February 2, 2019 for their annual retreat. Here the City Council adopted four (4) priorities for calendar year 2019 including “Fiscal Sustainability”. Discussion For the purpose of developing this workplan, staff has attempted to encapsulate what the Council means by the term fiscal sustainability. “Fiscal Sustainability” is the ability of a government agency to provide ongoing services while maintaining its finances at a credible and serviceable position with a long-term balance of resources and the cost of doing business. In order to accomplish this, governments adopt budgets and implement expense controls, while engaging in continual strategic forecasting of future revenues and liabilities, environmental factors, and socio-economic trends in order to adapt financial planning accordingly. The goal of this workplan is to continue to make proactive progress towards fiscal sustainability for the City of Palo Alto in order to maintain the quality of life that the City of Palo Alto supports through its services. Engaging the public and fostering discussion on the City's current and projected financial status are elements of this, as is identifying strategies for the City Council to consider. In order to achieve fiscal sustainability, the ecosystem that supports a government agency must be understood and evaluated in totality. The day to day financial management of the organization is equally as important as the services provided by the City’s workforce and the local (and broader) economy that is impacting City revenues and expenditures. It is only by achieving a sound equilibrium balancing our resources, services, and costs, that fiscal sustainability can be achieved. The diagram below depicts this ecosystem: Staff has identified several initiatives for prioritization because of their propensity to enhance one or more sides of this ecosystem; they may: expand or improve services to the Palo Alto community, increase or leverage resources, or reduce or mitigate costs. The proposed Fiscal Sustainability Workplan for 2019 organizes these initiatives into three categories: 1) activities previously approved or directed by the City Council and currently resourced, 2) activities approved or directed by the City Council but not yet resourced, and 3) newly proposed or potential activities not yet resourced. Overall, the workplan represents a variety of initiatives intended to improve the City’s fiscal sustainability position. They reflect a range of policy actions, process improvements, and City of Palo Alto Page 3 service model shifts that could: reduce costs, mitigate future increases in cost, add resources, or more effectively use existing resources, while maintaining services to the public. It should be noted, however, that in pursuing this workplan a near term analogy applies. In order for staff to maintain a balanced ecosystem, the completion of activities during 2019 that have not yet been resourced would require a reallocation of resources; most notably a finite resource, staff time. This is likely to result in a reduction of resources – and an associated reduction in service – to other programs, initiatives, and competing demands. DRAFT FISCAL SUSTAINABILITY WORKPLAN: Previously approved or directed by the City Council and currently resourced: these are fiscal sustainability initiatives or activities that are currently directed by the City Council and have funding or staffing resources identified for completion. A. Annual 5+ year financial planning through reports such as General Fund Long Range Financial Report (Nov/Dec); Utility Financial Forecast and Rate Proposal (March – May); and the FY 2020-2024 Capital Improvement Budget (May/June) B. Annual budget process resulting in balanced adopted operating and capital budgets C. Review and confirmation of funding for the City Council approved 2014 infrastructure plan D. Continued implementation of the Infrastructure Blue Ribbon Commission (IBRC) recommendations to catch-up and keep-up with infrastructure maintenance needs and additional operating and maintenance implications of new capital projects and facilities coming online E. Focused labor relations with represented and management employee groups closing contracts expeditiously and cost effectively F. Services Portfolio/Inventory (discussed below) including stakeholder engagement and education G. Targeted support for Downtown and California Ave. business districts Approved or directed by the City Council but not yet resourced: these are fiscal sustainability initiatives or activities that are currently directed by the City Council, however, they do not yet have funding or staffing resources identified for completion. H. Pension policy I. Improvement of code enforcement, 311 system, and customer relationship management activities J. Parking management City of Palo Alto Page 4 Newly proposed or potential activities proposed to be completed: these are new activities staff recommends undertaking as part of this 2019 workplan. K. Draft a formal budget development policy to guide annual financial planning and allocation of resources L. Develop proposals to address recruitment and retention challenges M. Analysis of revenue generating options N. Develop a plan for a business tax proposal, including reform of the business registry through implementation of a business license program. Strategic Action Update: Services Portfolio/Inventory In November 2018, staff embarked on the strategic action alongside the City Council’s immediate action in response to the City Council referral discussed above, identification of additional funding for payment of pension liabilities. Using the FY 2019 Adopted Budget, over 120 programs have been identified across the City, allocating over 1,000 full time positions and nearly 1,150 total positions when including part-time staffing. Over the past few months, staff throughout the city have engaged in documenting an inventory of services and programs across departments, using a common set of terms to describe the wide range of services and programs currently provided by the City. This has informally been referred to as our “services portfolio”. Staff has gathered the following information about each service and intends to review an example with the committee at the March 19th meeting: - a brief description, - quantitative identification of revenues, expenses, and staffing allocated, - notes about resources managed or leveraged such as volunteer hours, grants, etc., - the return on investment or the outcome delivered by these resources, and - identification of mandates such as state, Federal, or municipal code requirements. In addition, staff is examining enterprise initiatives across all services. The completed body of work is intended to be presented to the Finance Committee as part of the Fiscal Sustainability workplan (discussed above) and it is anticipated that the information will be used as a tool to begin outreach and education on both the resources and the costs of business that support the delivery of services to the community. Resource Impact Both staff and non-salary resources, such as consultants and the procurement of tools, will be necessary to complete this workplan. To complete the workplan and balance against other activities, a deliberate and judicious deployment of resources will be necessary. As portions of this workplan are developed more fully, resource needs will be identified at that time for the specific project. City of Palo Alto Page 5 Policy Implications This recommendation aligns with existing City policy and City Council direction. Environmental Review This report is not a project for the purposes of the California Environmental Quality Act (CEQA). Environmental review is not required. Attachments: • ATTACHMENT A: List of Enterprise Activities ATTACHMENT A DRAFT List of Enterprise Activities External Activities 1. Airplane Noise: resources related to airplane noise 2. Audit Recommendations (and/or impacts): services, business processes, or programs that are due to, impacted by, or were a direct result of an audit recommendation. 3. Boards, Commissions, & Regional or Interagency Support: resources dedicated to supporting various City Boards & Commissions, seats on external boards/commissions on which the City is a representative. This includes regional coordination and activities with other entities in an official capacity or sharing resources across agencies. 4. Communications/Community Engagement: resources dedicated to marketing, communications, and/or community/stakeholder outreach. An example may be the Police Department’s communication officer who addresses the press and the community. Also, the Zero Waste Team’s contract for advertising and staff that works on the marketing and advertising for the program. 5. Healthy Cities/Healthy Communities: Resources for promoting or modeling the healthy city healthy communities’ goals and priorities of the City. It’s about public policy that fosters a healthy society. That means equity, health for all, and attention to such things as supportive environments and livability. 6. Public/Private Partnership: resources dedicated to supporting organization such as ‘Friends of’ or other partnerships through stipends or staffing resources that support non-profits. 7. Resiliency/Emergency Preparedness: resources dedicated to the planning or execution of redundancies for emergencies or potential emergencies. One example is the City’s sea level rise project. 8. Special Events: Resources dedicated to support, staffing, or planning of special events within the City. 9. Sustainability: The City’s sustainability action plan that requires departments across the City to work on and weave different sustainability goals into daily business. These are resources dedicated to the implementation or ongoing costs of adherence to the sustainability action plan.