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Home My WebLink About2020-04-21 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, April 21, 2020 Regular Meeting 7:00 PM ****BY VIRTUAL TELECONFERENCE ONLY*** https://zoom.us/join Meeting ID: 479-101-323 Phone: 1(669)900-6833 Pursuant to the provisions of California Governor’s Executive Order N-29- 20, issued on March 17, 2020, to prevent the spread of Covid-19, this meeting will be held by virtual teleconference only, with no physical location. The meeting will be broadcast on Cable TV Channel 26, live on YouTube at https://www.youtube.com/c/cityofpaloalto, and Midpen Media Center at https://midpenmedia.org. Members of the public who wish to participate by computer or phone can find the instructions at the end of this agenda. 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.Adoption of a Resolution Amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage) Increasing the Storm Water Management Fee by 2.5 Percent to $15.04 per Month per Equivalent Residential Unit for Fiscal Year (FY) 2021 2.Staff and the Utilities Advisory Commission Recommend the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year (FY) 2021 Water Utility Financial Plan, Including Proposed Reserve Transfers and an Amendment to the Water Utility Public Comment Presentation Presentation 2 April 21, 2020 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. Reserves Management Practices, With no Water Rate Adjustment for FY 2021 3.Staff Recommends the Finance Committee Recommend the City Council Make no Changes to Wastewater Rates for Fiscal Year (FY) 2021 Beginning July 1, 2020 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. 3 April 21, 2020 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. Public Comment Instructions Members of the Public may provide public comments to virtual meetings via teleconference or by phone. 1. Spoken public comments using a computer will be accepted through the teleconference meeting. To address the Committee, click on the link below to access a Zoom-based meeting. Please read the following instructions carefully. A. You may download the Zoom client or connect to the meeting in- browser. If using your browser, make sure you are using a current, up-to-date browser: Chrome 30+, Firefox 27+, Microsoft Edge 12+, Safari 7+. Certain functionality may be disabled in older browsers including Internet Explorer. B. You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. C. When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. D. When called, please limit your remarks to the time limit allotted. E. A timer will be shown on the computer to help keep track of your comments. 2. Spoken public comments using a smart phone will be accepted through the teleconference meeting. To address the Committee, download the Zoom application onto your phone from the Apple App Store or Google Play Store and enter the Meeting ID below. Please follow the instructions B-E above. 3. Spoken public comments using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Committee. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. https://zoom.us/join Meeting ID: 479-101-323 Phone No: 1 (669) 900-6833 City of Palo Alto (ID # 11252) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/21/2020 City of Palo Alto Page 1 Summary Title: Storm Water Management Fee Increase for FY2021 Title: Adoption of a Resolution Amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage) Increasing the Storm Water Management Fee by 2.5 Percent to $15.04 Per Month Per Equivalent Residential Unit for Fiscal Year (FY) 2021 From: City Manager Lead Department: Public Works Recommendation Staff recommends that the Finance Committee recommend that Council adopt the attached resolution (Attachment A) amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage), to implement a 2.5% rate increase consistent with the applicable Consumer Price Index, increasing the monthly charge per Equivalent Residential Unit by $0.36, from $14.68 to $15.04 for Fiscal Year 2021. Background On April 11, 2017, a majority of Palo Alto property owners approved a ballot measure authorizing a monthly Storm Water Management Fee to fund storm drain capital improvement projects, enhanced maintenance of the storm drain system, storm water quality protection programs and more. Council certified the results of the ballot proceeding on April 17, 2017. The approved ballot measure contained an annual fee escalator clause that permits the Council to consider raising the Storm Water Management Fee each year to account for inflationary cost increases. Specifically, the ballot measure stated that: “In order to offset the effects of inflation on labor and material costs, the maximum rate for the Storm Water Management Fee (and each component of the Storm Water Management Fee) will be increased annually each July 1 (beginning July 1, 2018), by the lesser of (i) the percentage change in the Consumer Price Index [CPI] for the San Francisco-Oakland-San Jose CSMA, published by the United States Department of Labor, Bureau of Labor Statistics during the prior calendar year or (ii) 6%. The City Council would have the authority to set the rate for the Storm Water Management Fee (and each component of the Storm Water Management Fee) at any rate that is less than or equal to the inflation adjusted maximum rate.” City of Palo Alto Page 2 On June 17, 2019, Council adopted a resolution to implement the Storm Water Management Fee to be $14.68 per month per Equivalent Residential Unit (ERU), effective July 1, 2019. Discussion Staff has determined from Bureau of Labor Statistics records that the local CPI for the San Francisco-Oakland-San Jose CMSA increased by 2.5% between December 2018 and December 2019. As the CPI rate is substantially lower than 6%, consistent with the ballot measure, staff recommends that the Storm Water Management Fee be increased by the CPI in order to keep fund revenues consistent with general cost increases and to provide sufficient funds for planned storm water management capital and operating expenditures. To enact the Storm Water Management Fee increase, Council must adopt the attached resolution amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage). The new rate for the Storm Water Management Fee will be $15.04 per month per ERU. Single-family residential properties are billed a monthly amount based on parcel size, in accordance with the following table: RESIDENTIAL RATES (Single-Family Residential Properties) PARCEL SIZE (sq.ft.)ERU < 6,000 sq.ft.0.8 ERU 6,000-11,000 sq.ft.1.0 ERU > 11,000 sq.ft.1.4 ERU Commercial, industrial, institutional, and multi-family residential properties are billed monthly at a rate of 1.0 ERU for each 2,500 square feet of impervious surface on the parcel. Timeline The Storm Water Management Fee increase will take effect on July 1, 2020. Resource Impact The 2.5%increase in rates is expected to increase annual revenue to the Storm Water Management Fund by $186,000,and if appproved will be reflected in the Public Works Department Storm Water Management Fund FY 2021 operating budget revenue. Stakeholder Engagement Staff presented the 2.5%rate increase to the Storm Water Management Oversight Committee as a preliminary proposed base budget item for the development of the Fiscal Year 2021 Storm Water Management Fund operating budget.The Committee consists of seven members from the public and was established to review proposed storm water management capital improvements and operating programs to be funded from the Storm Water Management Fees and to monitor expenditures of the fund. Environmental Review The adoption of this change to the Storm Water Management Fee to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital City of Palo Alto Page 3 improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). Attachments: ·Resolution Amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage) NOT YET APPROVED 6055362 1 Resolution No. ______ Resolution of the Council of the City of Palo Alto Amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage) Increasing thee Storm Water Management Fee by 2.5% to $15.04 Per Month Per Equivalent Residential Unit for Fiscal Year 2021 The Council of the City of Palo Alto RESOLVES as follows: SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule D-1 (Storm and Surface Water Drainage) is hereby amended to read in accordance with sheet D-1-1, attached hereto and incorporated herein. The foregoing Utility Rate Schedule, as amended, shall become effective July 1, 2020. SECTION 2. The Council finds that this rate increase is being imposed to offset the effects of inflation on labor and material costs pursuant to the annual inflationary fee escalator provision of the Storm Water Management Fee ballot measure, which was approved by a majority of Palo Alto property owners on April 11, 2017. SECTION 3. The Council finds that the revenue derived from the authorized adoption enumerated herein shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. / / / / / / / / / / / / / / / / / / / / / / NOT YET APPROVED 6055362 2 SECTION 4. The Council finds that the adoption of this resolution changing the Storm Water Management Fee to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: __________________________ _____________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: ___________________________ _____________________________ Assistant. City Attorney City Manager _____________________________ Director of Public Works _____________________________ Director of Administrative Services GENERAL STORM AND SURFACE WATER DRAINAGE UTILITY RATE SCHEDULE D-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 7-1-2020 Supersedes Sheet No.D-1-1 dated 7-1-2019 Sheet No. D-1-1 A. APPLICABILITY: This schedule applies to all Storm and Surface Water Drainage Service, excepting only those users and to the extent that they are constitutionally exempt under the Constitution of the State of California or who are determined to be exempt pursuant to Rule and Regulation 25. B. TERRITORY: Inside the incorporated limits of the city of Palo Alto and land owned or leased by the City. C. RATES: Per Month: Storm Drainage Fee per Equivalent Residential Unit (ERU) ............................................ $15.04 D. SPECIAL NOTES: 1. An Equivalent Residential Unit (ERU) is the basic unit for computation of storm drainage fees for residential and non-residential Customers. All single-family residential properties shall be billed the number of ERUs specified in the following table, based on an analysis of the relationship between impervious area and lot size for Palo Alto properties. RESIDENTIAL RATES (Single-Family Residential Properties PARCEL SIZE (sq.ft.) ERU <6,000 sq.ft. 0.8 ERU 6,000 - 11,000 sq.ft. 1.0 ERU >11,000 sq.ft. 1.4 ERU All other properties will have ERU's computed to the nearest 1/10 ERU using the following formula: No. of ERU = Impervious Area (Sq. Ft.) 2,500 Sq. Ft. 2. For more details on the Storm Drainage Fee, refer to Utilities Rule and Regulation 25. {End} City of Palo Alto (ID # 11051) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/21/2020 City of Palo Alto Page 1 Summary Title: Fiscal Year 2021 Water Utility Financial Plan Title: Staff and the Utilities Advisory Commission Recommend the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year (FY) 2021 Water Utility Financial Plan, Including Proposed Reserve Transfers and an Amendment to the Water Utility Reserves Management Practices, With no Water Rate Adjustment for FY 2021 From: City Manager Lead Department: Utilities RECOMMENDATION Staff requests that the Finance Committee recommend that the Council: 1. Adopt a Resolution (Attachment A) approving: a. The Fiscal Year (FY) 2021 Water Utility Financial Plan (Attachment B); and b. Up to a $3 million transfer from the Operations Reserve to the CIP Reserve in FY 2020; and c. Up to a $5 million transfer from the Operations Reserve to the Rate Stabilization Reserve in FY 2020; and d. Up to an $8 million capital program contribution from the Operations Reserve to the CIP Reserve in FY 2021; and e. Amendments to the Water Utility Reserves Management Practices relating to the CIP Reserve (as set forth in the Financial Plan, with a redline provided as Attachment C); and f. Approve the maintenance of a balance in the Rate Stabilization Reserve through FY 2028 in order to provide greater rate stabilization to customers. EXECUTIVE SUMMARY The FY 2021 Water Utility Financial Plan includes projections of the utility’s costs and revenues for FY 2020 through FY 2025. Costs are projected to rise by about 4% per year over the next several years. Capital projects were deferred in FY 2019 due to nonresponsive construction bids leading to lower capital costs than budgeted. Many of these deferred capital projects are anticipated to City of Palo Alto Page 2 be completed in FY 2020 or FY 2021 and reserve CIP funds are available for those in the year end 2019 balances. Although capital investment needs will fluctuate from FY 2021 through FY 2025, there are enough funds currently in reserves to hold rates steady in FY 2021 while still fully funding budgeted capital investments. The SFPUC is projecting no increases in water supply rates until FY 2023. At that point the SFPUC projects a water supply rate increase of 9% followed by 13% in FY 2024 and 5% in FY 2025. These increases, together with capital investment needs such as one-time needed reservoir replacements, will place upward pressure on Palo Alto’s water rates. To fund these increasing costs while minimizing rate increases for the City’s water customers, staff recommends transferring funds in FY 2020 and FY 2021 to the Rate Stabilization Reserve so that funds will be available in that reserve to allow for projected customer rate increases of only 3% to 4% per year between FY 2022 and FY 2025. BACKGROUND Every year staff presents the Finance Committee with Financial Plans for the Electric, Gas, Water, and Wastewater Collection Utilities. The Financial Plans recommend rate adjustments required to maintain the financial health of these enterprises. These Financial Plans include a comprehensive overview of the operations of each enterprise, both retrospective and prospective, and are intended to be a reference for Finance Committee 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. Most of the City’s water comes from the San Francisco Public Utilities Commission (SFPUC)’s Hetch Hetchy water system. This same system serves San Francisco and several other Bay Area cities. The system is run by San Francisco, but as much as two thirds of the water is used outside of San Francisco by 26 cities, water districts, and private utilities. These agencies, including CPAU, are frequently referred to as the “wholesale customers” (as compared to the SFPUC’s “retail customers” in San Francisco). The Bay Area Water Supply and Conservation Agency (BAWSCA) represents the wholesale customers and negotiates with the SFPUC on their behalf. BAWSCA also ensures contract compliance through regular review of the SFPUC’s accounting and capital expenditures.1 The Water Utility has two main costs: water supply costs (primarily the cost of water delivered to Palo Alto from the Hetch Hetchy water system) and the costs of operating the distribution system (the system of pipes, pumps, reservoirs, and other infrastructure that carries water to Palo Alto customers). As discussed in previous years, both cost components have been increasing and are expected to continue to increase. For many years the largest cost increases have been on the water supply side. This is due primarily to major capital investments the SFPUC has made since 2010, partly due to pressure 1 For a video summary of BAWSCA’s activities, see https://vimeo.com/283596665/5619ce2c11 City of Palo Alto Page 3 from wholesale customers. The Water System Improvement Program (WSIP) is a $4.8 billion capital improvement program, one of the largest in the country, to rehabilitate and seismically strengthen the lower portions of the Hetch Hetchy water system. One of the goals is to achieve the capability to return to service within 24 hours after a major earthquake. Although much of the work is complete (the program was 98.2% complete as of September 2019), some of the projects are still under construction and bond financing of WSIP projects over the next several years will continue to drive wholesale rates up. The program has greatly improved the resiliency of the Hetch Hetchy water system but has also led water supply costs to double. By contrast, CPAU’s capital and operational costs have increased roughly at inflation for the last five years. This financial plan projects that capital and operational costs will continue to increase at approximately 4% per year over the next five years. The Finance Committee reviewed preliminary financial forecasts at its March 3, 2020 meeting (Staff Report #11077). The Utilities Advisory Commission (UAC) reviewed the Water Financial Plan at its March 5, 2020 meeting. The UAC accepted staff’s recommendation and approved the proposed FY 2021 Financial Plan unanimously. One Commissioner suggested that the Finance Committee consider a rate increase in FY 2021 to smooth out the rate increase trajectory over the coming five years. The meeting minutes were not available as of the time of publishing this report. City of Palo Alto Page 4 DISCUSSION Staff’s annual assessment of the financial position of the City’s water 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 adequately to recover these costs. The current rate proposals are also based on the cost of service (COS) methodology described in the 2012 Palo Alto Water Cost of Service & Rate Study, which was updated in 2015, and the 2015 Drought Rate memorandum completed by Raftelis Financial Consultants, which was updated in 2019 and titled “Proposed FY 2020 Water Rates” (see Attachment Q to Staff Report #102952). Staff proposes no adjustment to water rates in FY 2021. Tables 1 through 3 below illustrate the current rates that would remain unchanged under this financial plan. The rates shown below are in addition to the pass-through commodity rate that is charged to customers based on SFPUC supply charges. The pass-through commodity rate is currently $4.10 per CCF. SFPUC is not anticipated to increase its supply charges in FY 2021. Table 1: Current Water Consumption Charges in $/CCF (No Change is Proposed for FY 2021)3 W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 2.56 Tier 2 Rates 5.97 W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 5.50 2 A cost of service study (COS) is a study using industry-standard techniques to determine how the costs of running the utility should be recovered from its customers; charges to each customer are set in proportion to the cost of serving that customer. 3 Water consumption charges shown in Table 1 does not include the $4.10 per CCF pass-through commodity rate. City of Palo Alto Page 5 Table 2: Current Monthly Service Charges for W-1, W-4 and W-7 Meter Size Monthly Service Charge ($/month based on meter size) Residential (W-1) Commercial (W-4) and Irrigation (W-7) 5/8” 20.25 17.71 3/4” 20.25 23.67 1” 20.25 35.59 1 ½” 65.40 65.40 2” 101.17 101.17 3” 214.44 214.44 4” 381.37 381.37 6” 780.79 780.79 8” 1,436.57 1,436.57 10” 2,271.20 2,271.20 Table 3: Current Monthly Service Charges for Fire Services (W-3) Meter Size Monthly Service Charge ($/month based on meter size) Current (7/1/19) 2” $4.17 4” $25.81 6” $74.96 8” $159.74 10” $287.27 12” $464.02 Bill Impact of Proposal There is no bill impact for water utility customers. FY 2021 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 4 shows the projected rate adjustments over the next five years and their impact on the annual median residential water bill for 5/8” customers. These projected rate adjustments include the impact of projected changes to the pass-through commodity rate. City of Palo Alto Page 6 Table 4: Projected Rate Adjustments, FY 2021 to FY 2025 (5/8” meter) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Water Utility 0% 3% 3% 4% 4% Estimated Bill Impact ($/mo)1 $0 $2.70 $2.80 $3.80 $4.00 1) estimated impact on median residential water bill for customers with 5/8” meter, which is currently $90.42. Figures 1 and 2 below illustrate the projected increases in the Water Utility’s costs between FY 2020 and FY 2025. Figure 1: FY 2020 and FY 2025 costs City of Palo Alto Page 7 Figure 2: Percentage of Total Cost Increase From FY 2020 to FY 2025 Attributed to Supply, Capital, and Operations Costs Note that Figure 1 reflects the capital funded by rate revenue in FY 2020, while the 2025 bar shows the capital program contribution to the CIP Reserve in 2025, if Council approves the proposal in this Financial Plan. In addition, $15 million in capital investments is planned in FY 2020, above what is listed in Figure 1, which will be funded with existing reserves. A major driver for the increase in the water utility’s costs (and therefore rates) over the next several years is operations cost. Inflationary increases of 2 to 4% per year are factored into these changes and, also, larger benefit cost increases to reflect a 6.2% discount rate for pension liabilities per Council’s recommendation. Salaries and benefits account for less than 20% of the water fund’s overall costs, so while these benefits assumption changes do create larger expense projections, they are not significantly higher than they would have been under prior assumptions. Operations costs are projected to increase by around 4.5% overall over the forecast period. The supply cost of water is also a major driver. Wholesale water costs are adopted by the SFPUC, and generally have changed on an annual basis. Costs are projected to increase annually on average by 3.4% per year from FY 2020 to FY 2025. The SFPUC is currently engaged in a $4.8 billion Water System Improvement Program (WSIP) for both local (San Francisco) and regional City of Palo Alto Page 8 projects. As of September 30, 2019, 43 of the 52 regional projects were complete or in close- out while 6 of the regional projects were under construction and 1 was in pre-construction.4 This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. For most of those costs, funded with bond financing, the costs will be paid off over approximately 30 years. The WSIP completion date approved by the SFPUC is December 30, 2021, as adopted by the SFPUC in March of 2018. However, the latest quarterly report forecasts overall WSIP completion by June 2022. The regional WSIP project remaining in pre-construction is the Alameda Creek Recapture project where environmental impact report work is currently ongoing. Current major projects underway are the regional groundwater storage and recovery project and fish passage facilities within the Alameda Creek Watershed. As WSIP projects are completed, SFPUC is pursuing a suite of other capital improvement work; dam safety improvements and Mountain Tunnel repairs are rate increase drivers during the next 10-year timeframe. Future and in-progress construction work will require bond funding, and the SFPUC’s financial plans show debt service cost for the water enterprise growing by 31% between FY 2020 and FY 2025, and by nearly 50% by FY 2028.5 Initial wholesale rate increase projections are 5.5% per year on average through FY 2025 to cover increasing costs, primarily debt service from ongoing capital investments. Changes in usage due to drought, or recovery from drought, can make the magnitude of future increases difficult to predict. The SFPUC’s costs to operate the Regional Water System are primarily fixed costs, so the water rate charged to wholesale customers like the City of Palo Alto is highly dependent on usage by all users of the Regional Water System. The City’s FY 2021 Water Utility Financial Plan assumes that, while the drought has ended and usage has increased, consumption will not fully return to pre-drought levels. This assumption is based on CPAU’s experience following past droughts. The SFPUC is currently working on its budget for FY 2021, and the long-range changes to wholesale costs are subject to change. Because wholesale sales of water by the SFPUC in recent years were higher than projected during the drought, the SFPUC has been collecting funds in its Balancing Account. The SFPUC will use these funds to offset rate increases. Based upon SFPUC’s current estimates, SFPUC does not anticipate needing to raise wholesale rates until FY 2023. There remains some uncertainty in the forecasts of capital costs for the water utility in coming years. Water main replacement costs have risen substantially in recent years. The regional and even national focus on infrastructure improvement has created labor shortages, leading to 4 First Quarter FY 2019-20 WSIP Regional Quarterly Report, https://sfwater.org/Modules/ShowDocument.aspx?documentid=14501 5 FY 2018-19 & FY 2019-20 Adopted SFPUC Budget, https://sfwater.org/modules/showdocument.aspx?documentid=13147 City of Palo Alto Page 9 higher bid prices than were seen in the past. Several factors go into main replacement cost, such as location as well as the length of main segments. The projects in FY 2019 and FY 2020, although of smaller segment size than in later years, are also located in higher traffic areas which require enhanced strategic planning and coordination (such as University Avenue). Consistent with the FY 2020 financial plan, this plan includes larger main replacement construction projects every other year instead of smaller projects annually. This main replacement schedule will allow CPAU to meet its main replacement needs and addresses challenges in the current construction market while optimizing current staffing resources. This shift to larger main replacement construction projects every other year is anticipated to attract more contractors to bid on the larger projects. Additionally, this main replacement project schedule for water will be staggered with wastewater and gas (water and wastewater construction every even year and gas construction every odd year), which will ease scheduling difficulties for inspection coverage due to shared inspection staff across water, wastewater, gas, and large development services projects. Beyond this, work has begun on the design of Corte Madera reservoir replacement project in FY 2019, and staff estimates the construction work for Corte Madera, together with design for the replacement of Dahl and Park reservoirs will cost an additional $2 million in FY 2021. The replacements planned for the Dahl and Park reservoirs in FY 2023 and 2026 are estimated to cost $3.5 to $3.7 million, respectively. Although the revised main replacement schedule is important for the reasons described above, fluctuations in capital expenditures can lead to fluctuations in customer rates. To promote rate stability and provide continuity in water expenditure levels, this plan establishes a consistent annual contribution from the Operations Reserve to the CIP Reserve. CIP projects will then be charged to the CIP Reserve, which will experience fluctuations in its balance as a result of projects carried over from past years (but already funded) and as a result of the two-year project cycle. This should enable rate increases to remain relatively smooth. Figure 3 below shows the projected CIP Reserve balances under this Financial Plan. Staff proposes modifications to the Water Utility Reserves Management Practices to synchronize them with the staggered main replacement schedule, as well as annual funding based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the modifications would set a new maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48 months of budgeted CIP expense.6 Staff also proposes that the Water Utility Reserves Management Practices be amended to provide that if there are funds in this reserve in excess of the maximum level, staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. The proposed amendment would also authorize Staff to seek City Council approval to hold funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. 6 Each month is calculated based upon 1/12 of the annual budget. City of Palo Alto Page 10 Although this Financial Plan includes a forecast period of five years, or 60 months, an even number of years (48 months or 4 years) is used for the CIP Reserve maximum calculation, because of the staggered main replacement schedule including a larger main replacement project every other year.7 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This maximum in FY 2021 is $9.6 million and the minimum in FY 2021 is $1.9 million. Table 5 below shows the planned capital spending in row 12 fluctuating from year to year with the staggered main replacement schedule, and shows the stable capital program contributions to the CIP Reserve in rows 9 and 10. The Operations Reserve is shown as combined with unassigned funds, because when the Operations Reserve reaches its maximum level, any further additions to the Water Utility’s Fund Balance are considered unassigned. In accordance with the Water Utility Reserves Management Practices, the attached Financial Plan includes a plan to assign these funds to both rate stabilization and capital investment purposes. Figure 4 shows the amount of funds that are considered unassigned during the forecast period, together with reserve balance changes for each reserve from FY 2019 and projected through FY 2025. 7 For example, in this Financial Plan for FY 2021, the 48-month period to use to derive the annual average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48-month period to use to derive the annual average would be FY 2022 through FY 2025 etc. City of Palo Alto Page 11 Figure 3: Projected Capital Reserve Balances FY 2021 to FY 2025 Figure 4: Actual Reserve Levels for FY 2019 and Projections through FY 2025 City of Palo Alto Page 12 Table 5: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Capital Program Contribution To/(From) Reserves, and Operations Reserve Guideline Levels for FY 2020 to FY 2025 ($000) FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Starting Balance (1) Operations/Unassigned 20,652 18,583 14,496 12,126 11,332 11,889 (2) Rate Stabilization 4,069 9,069 12,569 12,569 12,569 9,500 (3) CIP 2,726 5,726 9,466 8,601 9,890 5,851 Revenues (4) Total Revenue 49,655 49,005 49,815 50,641 51,958 53,310 (5) Transfers In 550 561 572 584 595 607 Transfers (6) Operations/Unassigned (8,000) (5,000) (3,500) - 3,069 3,000 (7) Rate Stabilization 5,000 3,500 - - (3,069) (3,000) (8) CIP 3,000 1,500 3,500 - - - Capital Program Contribution (9) Operations/Unassigned - (8,000) (8,240) (8,487) (8,742) (9,004) (10) CIP - 8,000 8,240 8,487 8,742 9,004 Expenses (11) Total Expenses other than CIP (38,694) (40,196) (40,553) (43,057) (45,841) (47,136) (12) Planned CIP (5,132) (5,760) (12,605) (7,199) (12,780) (7,376) (13) Transfers Out (447) (456) (465) (474) (484) (494) Ending Balance (1)+(4)+(5)+(6) +(9)+(11)+(13)* Operations/Unassigned 18,583 14,496 12,126 11,332 11,889 12,172 (2)+(7) Rate Stabilization 9,069 12,569 12,569 12,569 9,500 6,500 (3)+(8)+(10)+ (12)* CIP 5,726 9,466 8,601 9,890 5,851 7,479 Operations Reserve Guideline Levels (14) Minimum 6,808 7,064 7,131 7,552 8,019 8,242 (15) Maximum 12,721 13,215 13,332 14,156 15,071 15,497 * Note: The current year, FY 2020, differs from FY 2021 through FY 2025 in that Planned CIP (item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for FY 2021 – FY 2025 reflects Planned CIP (item 12) as an expense in the CIP Reserve. Capital Projects & Reserve Higher bid cost and delays in project schedules resulted in a deferment of main replacement projects in FY 2017 through FY 2019, temporarily lowering CIP expenditures. This resulted in the Operations Reserve being filled to the maximum guideline level. As current Operations Reserve levels are sufficient to fund deferred capital projects and as supply costs are anticipated to remain relatively flat until FY 2023, staff recommends transferring up to $3 million from the Operations Reserve to the CIP Reserve in FY 2020, and projects the need for reserve transfers of up to $1.5 million to the CIP reserve in FY 2021 and up to $3.5 million to the CIP reserve in FY City of Palo Alto Page 13 2022. Staff is currently requesting Council to approve the $3 million transfer from the Operations Reserve to the CIP Reserve in FY 2020 and will request Council approval for any further transfers to the CIP Reserve in the FY 2022 Water Utility Financial Plan once the year- end FY 2020 reserve balances are known. Beginning in FY 2021, capital projects will be funded from CIP Reserves. Having these funds in place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. This funding is equivalent to the amount needed to fund one-time reservoir replacements for each of the following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and $3.5 million in FY 2023 for a total of nearly $8 million. By transferring $3 million to the CIP Reserve in FY 2020, $1.5 million to the CIP Reserve in FY 2021, and $3.5 million to the CIP Reserve in FY 2022, although it will not all be needed for the reservoir replacements until FY 2023, this will ensure the reserve has sufficient funding for budgeted CIP as fluctuating annual amounts of capital investment occur going forward. Table 5 above shows the anticipated CIP Reserve transfers in FY 2020 through FY 2025. There is also approximately $15 million in CIP that was budgeted in 2019 or prior years that is reappropriated or carried forward from previous years and is currently in the CIP Reappropriations and CIP Commitments Reserves. That total includes approximately $1.4 million in commitments (CIP Commitments Reserve), $4.1 million for one-time projects, $8.2 million for water main replacements, and $1.4 for ongoing projects (CIP Reappropriations Reserve). See Appendix B of the Water Utility Financial Plan for detailed information. Additionally, the attached Financial Plan proposes that a capital program contribution would be made annually from the Operations Reserve to the CIP Reserve ($8 million in FY 2021, and $8 million in FY 2022 and future years plus annual inflationary increases) to adequately fund the CIP budget. Rate Stabilization Reserve This Financial Plan recommends funding the Rate Stabilization Reserve by transferring up to $5 million from the Operations Reserve in FY 2020, and projects the need for reserve transfers of up to an additional $3.5 million in FY 2021. Staff is currently requesting Council to approve the $5 million transfer from the Operations Reserve to the CIP Reserve in FY 2020 and will request Council approval for the FY 2021 transfer from the Operations Reserve to the Rate Stabilization Reserve in the FY 2022 Water Utility Financial Plan. The Rate Stabilization Reserve will be used to buffer rate impacts that would have occurred from the utility’s need to pay for a series of large wholesale supply rate increases that are anticipated to begin annually in FY 2023. Beginning in FY 2024, CPAU expects to transfer funds annually from the Rate Stabilization Reserve to the Operations Reserve to limit water rate increases. Although the existing council- approved reserve practices call for rate stabilization reserves to be spent within five years of a transfer, this schedule would leave the Rate Stabilization Reserve with some funds beyond FY 2025. Staff and UAC recommend that the City Council approve this deviation from the City of Palo Alto Page 14 guidelines in order to allow rate smoothing to occur in FY 2024 through 2028, when it is anticipated to be needed. Water Bill Comparison with Surrounding Cities Table 6 compares water bills for residential customers to those in surrounding communities as of January 2020 (under current the City’s current water rates). Palo Alto customers have some of the highest monthly bills of the group, although bills for smaller water users are lower than in some surrounding communities. It is unclear at this time what water rate changes may be implemented in surrounding communities for FY 2021. The average calculated in the following table is the mean of the six surrounding communities listed. These communities are the same six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas and Electric industries. Table 6: Residential Monthly Water Bill Comparison Usage (CCF/month) Residential monthly bill comparison ($/month)* As of January 2020 Palo Alto Menlo Park Mountain View Hayward Redwood City Santa Clara Los Altos Average of Surrounding Communities 4 $46.89 $56.69 $37.92 $37.20 $54.04 $43.69 $41.26 $45.13 (Winter median) 7 $70.28 $85.35 $58.74 $54.60 $72.43 $62.44 $59.17 $65.46 (Annual median) 9 $90.42 $104.46 $72.62 $67.54 $85.91 $74.94 $71.10 $79.43 (Summer median) 14 $140.77 $150.03 $107.32 $103.24 $122.66 $106.19 $99.75 $114.87 25 $251.54 $249.10 $225.26 $181.78 $217.76 $174.94 $167.27 $202.69 *Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC. Changes from Last Year’s Financial Forecast Table 7 compares current rate projections to those projected in the Financial Plans from the last two years. As shown, the current rate projections for FY 2021, FY 2023 and FY 2024 are lower than projected last year while FY 2022 is the same. Delays in water main replacement and reservoir replacement resulted in an increase in reserves, which together with the use of the Rate Stabilization Reserve and the level approach to funding CIP through the CIP Reserve enables the more gradual increases projected in the current plan. City of Palo Alto Page 15 Table 7: Projected Water Rate Trajectory for FY 2021 to FY 2025 Projection FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Current (FY 2021 Financial Plan) 0% 3% 3% 4% 4% Last year (FY 2020 Financial Plan) 2% 3% 6% 6% - Two years ago (FY 2019 Financial Plan) 7% 6% 4% 4% - Changes to Reserve Guidelines Staff proposes modifications to the Water Utility Reserves Management Practices to synchronize them with the water utility’s staggered main replacement schedule, as well as the capital program contributions to the CIP Reserve. The new maximum and minimum CIP Reserve guideline levels as well as the funding plans are described above and in detail in the attached Financial Plan. Staff further proposes to modify the Water Utility Reserves Management Practices to provide that if there are funds in the CIP Reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Period. 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. Additionally, staff proposes that Council approve, pursuant to the last sentence of Section 6 of the Management Practices, to maintain funds in the Rate Stabilization Reserve through FY 2028. NEXT STEPS Assuming the Finance Committee supports staff’s recommendation, no notification of rate increases would be necessary because the current rates would not increase. The FY 2021 Water Utility Financial Plan and resolution to adopt the FY 2021 Water Utility Financial Plan will then go to the City Council with the FY 2021 budget for adoption. RESOURCE IMPACT Normal year sales revenues for the Water Utility will not be impacted by this proposal to maintain the current rates for FY 2021. The FY 2021 Budget is being developed concurrent with these rates and, depending on the final rates, adjustments to the budget may be necessary later. See the attached FY 2021 Water Financial Plan for a more comprehensive overview of projected cost and revenue changes for the next five years. City of Palo Alto Page 16 POLICY IMPLICATIONS Maintaining the current rates for FY 2021 is consistent with Reserve Management Practices and exemptions included in the Financial Plans and described above, and the rates were developed using a cost of service study and methodology consistent with the cost of service requirements of Proposition 218. ENVIRONMENTAL REVIEW The Finance Committee’s review and recommendation to Council on the FY 2021 Water Financial Plan does not meet the definition of a project requiring California Environmental Quality Act (CEQA) review under Public Resources Code Section 21065 thus no environmental review is required. Attachments: • Attachment A: Resolution Adopting Water FY 2021 Financial Plan • Attachment B: FY 2021 Water Utility Financial Plan • Attachment C: Water Utility Reserves Management Practices Attachment A * NOT YET APPROVED * 6055334 Resolution No. Resolution of the Council of the City of Palo Alto Approving the FY 2021 Water Utility Financial Plan and Amending the Water Utility Reserves Management Practices R E C I T A L S A. Each year the City of Palo Alto (“City”) regularly 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. The City 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 part of the Financial Plans. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby adopts the FY 2021 Water Utility Financial Plan. SECTION 2. The Council hereby approves the following transfers as described in the FY 2021 Water Utility Financial Plan: a. Up to $3,000,000 in FY 2020 from the Operations Reserve to the Capital Improvement Projects Reserve; b. Up to $5,000,000 in FY 2020 from the Operations Reserve to the Rate Stabilization Reserve; SECTION 3. The Council hereby approves a capital program contribution to the Capital Improvement Projects Reserve from the Operations Reserve (system revenues) of up to $8,000,000 in FY 2021. Annual rate-funded contributions beyond FY 2021 will be approved by Resolution annually. SECTION 4. The Council hereby approves the amendments to the Water Utility Reserves Management Practices as shown in Attachment C. Attachment A * NOT YET APPROVED * 6055334 SECTION 5. The Council hereby approves the maintenance of a balance in the Rate Stabilization Reserve through FY 2028 in order to provide greater rate stabilization to customers. SECTION 6. The Council finds that the adoption of this resolution does not meet the California Environmental Quality Act’s (CEQA) definition of a project under Public Resources Code Section 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, and therefore, no environmental review is required. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk Mayor APPROVED AS TO FORM: APPROVED: Assistant City Attorney City Manager Director of Utilities Director of Administrative Services FY 2021 WATER UTILITY FINANCIAL PLAN FY 2021 TO FY 2025 Attachment B March 2020 2 | Page FY 2021 WATER UTILITY FINANCIAL PLAN FY 2021 TO FY 2025 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 .................................................................................. 8 Section 3: Detail of FY 2021 Rate and Reserves Proposals ....................................................... 9 Section 3A: Rate Design ............................................................................................................... 9 Section 3B: Current and Proposed Rates ..................................................................................... 9 Section 3C: Proposed Reserve Transfers .................................................................................... 12 Section 4: Utility Overview .................................................................................................. 13 Section 4A: Water Utility History ............................................................................................... 14 Section 4B: Customer Base ........................................................................................................ 15 Section 4C: Distribution System ................................................................................................. 15 Section 4D: Cost Structure and Revenue Sources ...................................................................... 15 Section 4E: Reserves Structure ................................................................................................... 16 Section 4F: Competitiveness ...................................................................................................... 16 Section 5: Utility Financial Projections ................................................................................. 17 Section 5A: Load Forecast .......................................................................................................... 17 Section 5B: FY 2015 to FY 2019 Cost and Revenue Trends ........................................................ 19 Section 5C: FY 2019 Results ....................................................................................................... 20 Section 5D: FY 2020 Projections ................................................................................................ 20 Section 5E: FY 2021 – FY 2025 Projections ................................................................................ 21 Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 24 Section 5G: Alternate scenario .................................................................................................. 25 Section 5H: Long-Term Outlook ................................................................................................. 25 March 2020 3 | Page Section 6: Details and Assumptions ..................................................................................... 26 Section 6A: Water Purchase Costs ............................................................................................. 26 Section 6B: Operations .............................................................................................................. 27 Section 6C: Capital Improvement Program (CIP) ....................................................................... 28 Section 6D: Debt Service ............................................................................................................ 33 Section 6E: Other Revenues ....................................................................................................... 34 Section 6F: Sales Revenues ........................................................................................................ 34 Section 7: Communications Plan .......................................................................................... 34 Appendices ......................................................................................................................... 36 Appendix A: Water Utility Financial Forecast Detail ................................................................. 37 Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 39 Appendix C: Water Utility Reserves Management Practices ..................................................... 40 Appendix D: Description of Water Utility Operational Activities ............................................... 43 Appendix E: Sample of Water Utility Outreach Communications ............................................. 44 March 2020 4 | Page SECTION 1: DEFINITIONS AND ABBREVIATIONS BAWSCA Bay Area Water Supply and Conservation Agency CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons. CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department O&M Operations and Maintenance RFC Raftelis Financial Consultants, Inc. SFPUC San Francisco Public Utilities Commission SFWD San Francisco Water Department UAC Utilities Advisory Commission WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the transmission lines of the Hetch Hetchy Regional Water System. SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City’s Water Utility for FY 2021 through FY 2025. This Financial Plan provides for revenues to cover the costs of operating the utility safely over that period 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 Staff expects overall costs in the Water Utility to rise on average by about 4% per year from fiscal year (FY) 2021 to 2025. Operations cost projections rise on average by about 3% annually through the projection period. Water supply costs are based on current SFPUC projections and are the largest individual component of the utility’s costs. The cost of the City’s SFPUC water supply is increasing over the forecast period due to a series of major capital projects on the Hetch Hetchy Regional Water System. However, the SFPUC’s water supply rates will remain relatively flat through FY 2022 as SFPUC returns to customers reserves it accumulated in prior years, with rates rising steeply after FY 2022. See Section 6A: Water Purchase Costs for more information. Capital costs were lower than budgeted in FY 2019. In FY 2020 many of the budgeted capital projects that were deferred from previous years are anticipated to be completed and reserve funds are available for those. For this reason, funds needed are lower than originally budgeted in staff’s projection for FY 2020. For FY 2021 through 2025, capital expenditures will fluctuate for several reasons including one-time reservoir replacement projects and the switch to a two-year cycle (rather than an annual cycle) for main replacement construction projects. This main replacement schedule is important allow CPAU to meet its main replacement needs while addressing challenges in the current construction market and optimizing current staffing resources. However, fluctuations in capital expenditures can lead to fluctuations in customer rates. To promote rate stability and provide continuity in water expenditure levels, this plan incorporates a stable annual “capital contribution” from the Operations Reserve that is set aside in the capital reserve to absorb annual spending fluctuations. Section 6C: Capital Improvement Program (CIP) provides more detail. Table 1 below shows the costs for the Water Utility from FY 2019 through FY 2025. March 2020 5 | Page Table 1: Expenses for FY 2019 to FY 2025 (Thousand $’s) Expenses ($000) FY 2019 (act.) FY 2020 (est.) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Water Purchases 21,210 21,662 21,371 21,085 22,471 24,794 25,633 Operations 16,623 17,479 19,281 19,933 21,061 21,530 21,997 Capital Projects 11,791 5,132 8,000 8,240 8,487 8,742 9,004 TOTAL 49,625 44,274 48,652 49,258 52,019 55,067 56,634 This proposed Financial Plan projects that the Water Utility will need the rate increases shown in Table 2 to ensure that revenues cover costs and reserves remain healthy. Staff projects a need for sales revenue increases averaging about 3% per year through FY 2025. This is because water supply costs are projected to increase beginning in FY 2023, water sales are projected to decline somewhat, and little or no increase is expected in non-sales revenue (e.g. interest, connection fees). Table 2 also shows rate projections from the last two Financial Plans for FY 2020 and FY 2019, which projected higher rate increases. Delays in water main replacement and reservoir replacement projects resulted in an increase in reserves. In addition, the lack of projected increases from SFPUC until FY 2023, together with use of the Rate Stabilization Reserve to offset increases from SFPUC once they begin in FY 2023 will enable the more gradual rate increases projected in the current plan. Table 2: Proposed and Projected Water Rate Changes for FY 2021 to FY 2025 Projection FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Current 0% 3% 3% 4% 4% FY 2020 Plan 2% 3% 6% 6% - FY 2019 Plan 7% 6% 4% 4% - The Water Utility’s Rate Stabilization Reserve can be used to smooth rate increases over several years. This Financial Plan recommends further use of this reserve by transferring funds from the Operations Reserve to the Rate Stabilization Reserve in FY 2020 and FY 2021, and using those funds to mitigate rate increases that will begin annually in FY 2023. The use of the Rate Stabilization Reserve in this way, together with the cost and revenue projections in this Financial Plan will allow CPAU water rates to increase by 4% or less annually over the next five years. This Financial Plan projects that these reserves will be exhausted by the end of FY 2028. The Water Utility also has a Capital Improvement Program (CIP) Reserve that is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff proposes modifications to the Water Utility Reserves Management Practices to synchronize them with the staggered main replacement schedule, as well as annual funding based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the modifications would set a new maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48 March 2020 6 | Page months of budgeted CIP expense.1 Staff also proposes that the Water Utility Reserves Management Practices be amended to provide that if there are funds in this reserve in excess of the maximum level, staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. The proposed amendment would also authorize Staff to seek City Council approval to hold funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Appendix C, section 5, reflects the new maximum and minimum CIP Reserve guideline levels. Although this Financial Plan includes a forecast period of five years, or 60 months, an even number of years (48 months or 4 years) is used for the CIP Reserve calculations, because of the staggered main replacement schedule including a larger main replacement project every other year.2 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This maximum in FY 2021 is $9.6 million and the minimum in FY 2021 is $1.9 million. Previously, the minimum and maximum CIP Reserve guideline levels were 12 and 24 months of budgeted CIP expenditure, respectively. The 2020 Financial Plan anticipated replenishing the CIP Reserve by $5 million in FY 2020 and $4 million in FY 2021. This Financial Plan recommends transferring up to $3 million from the Operations Reserve to the CIP Reserve in FY 2020, and projects the need for reserve transfers of up to $1.5 million to the CIP Reserve in FY 2021 and up to $3.5 million to the CIP Reserve in FY 2022. Staff is currently requesting Council to approve the $3 million transfer from the Operations Reserve to the CIP Reserve in FY 2020 and will request Council approval for the other transfers to the CIP Reserve in the FY 2022 Water Utility Financial Plan once the year-end FY 2020 reserve balances are known. Beginning in FY 2021, capital projects will be funded from CIP Reserves. Having these funds earmarked will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or emergency projects. This funding is equivalent to the amount needed to fund one-time reservoir replacements for each of the following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and $3.5 million in FY 2023 for a total of nearly $8 million. By transferring $3 million to the CIP Reserve in FY 2020, $1.5 million to the CIP Reserve in FY 2021, and $3.5 million to the CIP Reserve in FY 2022, although it will not all be needed for the reservoir replacements until FY 2023, this will ensure the reserve has sufficient funding for budgeted CIP as fluctuating annual amounts of capital investment occur going forward. Figure 11 shows the projected CIP Reserve balances and guideline levels for FY 2021 through FY 2025. These modifications will make full use of the CIP reserve to manage fluctuations in capital investments while stabilizing customer rates. Higher bid cost and delays in project schedules resulted in a deferment of main replacement projects in FY 2017 through FY 2019, temporarily lowering costs. This resulted in the Operations 1 Each month is calculated based upon 1/12 of the annual budget. 2 For example, in this Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average would be FY 2022 through FY 2025 etc. March 2020 7 | Page Reserve being filled to the maximum guideline level, with surplus reserves available to phase in rate increases more slowly over the forecast period. The maximum guideline level for the Operations Reserve equals 120 days of operations and maintenance and commodity expense. At year end FY 2019, the maximum guideline level equaled $12.3 million while the total Operations Reserve plus Unassigned Reserve funds equaled $20.7 million, which is $8.4 million more than the maximum guideline level. Table 3 shows that the balance at the start of FY 2020 in the CIP Reserve is approximately $2.7 million (in row 3) and in the Operations Reserve plus Unassigned Reserve combined is $20.7 million (in row 1). Figure 7 shows the water utility reserve balances including the Unassigned Reserve balance at year end for FY 2019 and projected through FY 2025. However, these funds will be needed to adequately fund CIP investments and the CIP Reserve in FY 2020 through FY 2022, bringing the Operations Reserve within guidelines by the end of FY 2022. Table 3 shows the starting and ending balances for the Operations & Unassigned Reserves combined, Rate Stabilization Reserve, and CIP Reserve together with the Transfers To/(From) projected reserve transfers over the forecast period. See Section 3D: Proposed Reserve Transfers for more details. March 2020 8 | Page Table 3: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution To/(From) Reserves for FY 2020 to FY 2025 ($000) FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Starting Balance (1) Operations/Unassigned 20,652 18,583 14,496 12,126 11,332 11,889 (2) Rate Stabilization 4,069 9,069 12,569 12,569 12,569 9,500 (3) CIP 2,726 5,726 9,466 8,601 9,890 5,851 Revenues (4) Total Revenue 49,655 49,005 49,815 50,641 51,958 53,310 (5) Transfers In 550 561 572 584 595 607 Transfers (6) Operations/Unassigned (8,000) (5,000) (3,500) - 3,069 3,000 (7) Rate Stabilization 5,000 3,500 - - (3,069) (3,000) (8) CIP 3,000 1,500 3,500 - - - Capital Program Contribution (9) Operations/Unassigned - (8,000) (8,240) (8,487) (8,742) (9,004) (10) CIP - 8,000 8,240 8,487 8,742 9,004 Expenses (11) Total Expenses other than CIP (38,694) (40,196) (40,553) (43,057) (45,841) (47,136) (12) Planned CIP (5,132) (5,760) (12,605) (7,199) (12,780) (7,376) (13) Transfers Out (447) (456) (465) (474) (484) (494) Ending Balance (1)+(4)+(5)+(6) +(9)+(11)+(13)* Operations/Unassigned 18,583 14,496 12,126 11,332 11,889 12,172 (2)+(7) Rate Stabilization 9,069 12,569 12,569 12,569 9,500 6,500 (3)+(8)+(10)+ (12)* CIP 5,726 9,466 8,601 9,890 5,851 7,479 Operations Reserve Guideline Levels (14) Minimum 6,808 7,064 7,131 7,552 8,019 8,242 (15) Maximum 12,721 13,215 13,332 14,156 15,071 15,497 * Note: The current year, FY 2020 differs from FY 2021 through FY 2025 in that Planned CIP (item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for FY 2021 – FY 2025 reflects Planned CIP (item 12) as an expense in the CIP Reserve. SECTION 2B: SUMMARY OF PROPOSED ACTIONS Staff proposes the following action for the Water Utility in FY 2020 and FY 2021: 1. Transfer up to $3 million in FY 2020 from the Operations Reserve to the CIP Reserve. See Section 3D: Proposed Reserve Transfers for more details. 2. Transfer up to $5 million in FY 2020 from the Operations Reserve to the Rate Stabilization Reserve. See Section 3D: Proposed Reserve Transfers for more details. 3. An up to $8 million rate-funded contribution from the Operations Reserve to the CIP Reserve in FY 2021. See Section 6C: Capital Improvement Program (CIP) for more details. 4. Amendments to the Water Utility Reserves Management Practices relating to the CIP Reserve reflected in Appendix C, Section 5 and described above in Section 2A: Overview of Financial Position. March 2020 9 | Page 5. Approve the maintenance of a balance in the Rate Stabilization Reserve through FY 2028 in order to provide greater rate stabilization to customers. See Appendix C, Section 6 and description in Section 2A: Overview of Financial Position SECTION 3: DETAIL OF FY 2021 RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Water Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in Article XIII D of the California Constitution (Proposition 218) and applicable statutory law. The City structured current rates based on staff’s assessment of the financial position of the Water Utility, and updated current rates using the methodology from the March 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc. (RFC) (Staff Report 2676), RFC’s 2015 Memorandum: Proposed Water Rates updating the 2012 Study and analyzing drought rates (Staff Report 5951), as well as RFC’s 2019 Memorandum updating the 2012 study (Staff Report 10295). Staff plans to update the cost of service study in 1 to 2 years, 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. SECTION 3B: CURRENT AND PROPOSED RATES The current rates and surcharges became effective on July 1, 2019. CPAU has five rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size. All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30 day billing period) charged at the first tier price per CCF, and all additional units charged a higher tier price per CCF. Commercial customers, including most multi-family customers, pay a uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation service. For July 1, 2020, staff is proposing no rate increase. Water rates are composed of two general types of costs: commodity and distribution. Commodity costs are mainly volumetric in nature and charged by the San Francisco Public Utilities Commission (SFPUC). In April 2019, the SFPUC provided an estimate that their W-25 wholesale rate for agencies with long-term contracts would remain at $4.10/CCF in FY 2021. The SFPUC will not determine its final rate until May or June, 2020. Staff is using the SFPUC’s April 2019 estimate in this forecast for no rate increase. If March 2020 10 | Page SFPUC’s final rate for FY 2021 does increase, the City must notify customers 30 days in advance of the pass-through rate increase. Distribution rates cover all the costs to deliver water within the City, such as operations, maintenance, metering, billing, and capital improvements. In the past, the distribution costs would fluctuate depending on capital improvement spending. However, this plan provides a steady amount of capital improvement funding to the capital reserve beginning in FY 2021. Going forward, the CIP Reserve will reflect actual fluctuations in CIP expenditures (money spent on actual projects in a given year) beginning in FY 2021. Previously, CIP expenditures were reflected in the Operations Reserve. Table 3 reflects this change; in FY 2021 (row 12) shows planned CIP expenditures and the CIP Reserve balance is calculated by taking the starting balance for the CIP Reserve (row 3), adding the one-time transfers (row 8) and capital program contributions (row 10) and subtracting planned CIP expenditures (row 12). Section 5E: FY 2021 – FY 2025 Projections contains a more detailed description of this change. In this way, although CIP expenditures fluctuate from year to year, the capital program contribution to the CIP reserve is projected to remain fairly constant over the next five years, increasing by 3% per year on average. Operations costs are discussed in Section 6B: Operations, below. Customers have a separate commodity rate for purchased water from SFPUC relative to the rest of the distribution-related portion of the volumetric rates. This charge passes-through any future SFPUC rate increases to customers. All customers will pay this separate commodity cost for each unit of water in addition to the volumetric rate that is applicable for their customer class. The rates shown below are in addition to the pass-through commodity rate that is charged to customers based on SFPUC supply charges. The pass-through commodity rate is currently $4.10 per CCF. SFPUC is not anticipated to increase its supply charges in FY 2021. This automatically adjusting pass-through charge is effective July 1, 2019 through July 1, 2024 pursuant to Resolution 9844 “Resolution of the Council of the City of Palo Alto Adopting a Water Rate Increase and Amending Utility Rate Schedules W-1, W-2, W-3, W-4 and W-7, June 17, 2019. March 2020 11 | Page Table 4 shows the current consumption charges, which, like the rates in Tables 5 and 6, are not proposed to change for FY 2021. Table 4: Water Consumption Charges ($/CCF)3 W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 2.56 Tier 2 Rates 5.97 W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 5.50 3 Water consumption charges shown in Table 4 does not include the $4.10 per CCF pass-through commodity rate. March 2020 12 | Page Table 5 shows the current monthly service charges for rate schedule W-1, W-4 and W-7. Table 5: Current Monthly Service Charges for W-1, W-4 and W-7 Meter Size Monthly Service Charge ($/month based on meter size) Residential (W-1) Commercial (W-4) and Irrigation (W-7) 5/8” 20.25 17.71 3/4” 20.25 23.67 1” 20.25 35.59 1 ½” 65.40 65.40 2” 101.17 101.17 3” 214.44 214.44 4” 381.37 381.37 6” 780.79 780.79 8” 1,436.57 1,436.57 10” 2,271.20 2,271.20 Table 6 shows the current monthly service charges for rate schedule W-3 Table 6: Current Monthly Service Charges for Fire Services (W-3) Meter Size Monthly Service Charge ($/month based on meter size) Current (7/1/19) 2” $4.17 4” $25.81 6” $74.96 8” $159.74 10” $287.27 12” $464.02 SECTION 3C: PROPOSED RESERVE TRANSFERS In the FY 2018 Financial Plan, staff proposed transferring $1.87 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2018. This transfer was not necessary as increased sales during FY 2017 resulted in larger than expected revenues, largely from the drought surcharge. The drought surcharge was discontinued on July 1, 2017. Customer sales recovery after the drought in FY 2018 was more robust than staff’s initial projections, and in FY 2019 revenues were similar to projections and the Operations Reserve has remained healthy. The Rate Stabilization Reserve has a year-end FY 2019 balance of $4.07 million. This Financial Plan recommends further funding of this reserve by transferring $5 million from the Operations Reserve to the Rate Stabilization Reserve in FY 2020 and projects the need to transfer $3.5 million from the Operations Reserve to the Rate Stabilization Reserve in FY 2021. With these transfers, the Rate Stabilization Reserve would be available to fund a series of large wholesale supply rate March 2020 13 | Page increases that are anticipated to begin annually in FY 2023. The use of the Rate Stabilization Reserve in this way will allow CPAU water rates to increase by 4% or less annually over the next five years. Funds from the Rate Stabilization Reserve would be drawn down annually beginning in FY 2024 to minimize the need for a rate increase triggered by increasing costs. See Table 3 above, row 7, for a summary of the reserve transfers into and out of the Rate Stabilization Reserve. SFPUC projects wholesale rate increases from $4.10 per CCF currently to $4.47 per CCF in FY 2023, $5.06 per CCF in FY 2024, and $5.33 per CCF in FY 2025 with increases continuing beyond FY 2025. The Water Utility Reserves Management Practices states that if there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this reserve by the end of the Financial Planning Period. Once the funds are withdrawn under this plan, they will help keep rates lower by funding operations and supply costs. However, due to the ongoing large increases in supply rates expected to be passed through from SFPUC beyond 2025, staff recommends making a change to the regular approach. Specifically, staff requests approval to hold the funds in the Rate Stabilization Reserve until FY 2028 in order to help keep rates lower and gradually increase rates. The proposed modifications to the Water Utility Reserves Management Practices shown in Appendix C reflect this change. Based upon current reserve levels and capital budget needs staff recommends a transfer of $3 million from the Operations Reserve to the CIP Reserve in FY 2020, and projects a transfer of $1.5 million from the Operations Reserve to the CIP Reserve in FY 2021, and a transfer of $3.5 million from the Operations Reserve to the CIP Reserve in FY 2022 will be needed. The CIP Reserve currently contains $2.726 million. Table 3 above shows these proposed reserve transfers in row 8. Having these funds in place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. This funding is equivalent to the amount needed to fund one-time reservoir replacements for each of the following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and $3.5 million in FY 2023 for a total of nearly $8 million. The projected one-time spending needs for reservoir replacement are shown in Appendix B on the line labeled “WS-09000 Seismic Water System”. Through these one-time transfers to the CIP Reserve, although the funds will not all be needed for the reservoir replacements until FY 2023, this will ensure the reserve has sufficient funding for budgeted CIP as fluctuating annual amounts of capital investment occur going forward. In addition, the funds will help to stabilize rate fluctuations for customers resulting from fluctuations in capital spending. Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows details of reserves levels. SECTION 4: UTILITY OVERVIEW This section provides an overview of the utility and its operations. It provides general background information and helps readers better understand the forecasts in Section 5: Utility Financial Projections and Section 6: Details and Assumptions. March 2020 14 | Page SECTION 4A: WATER UTILITY HISTORY The Water Utility was established on May 9, 1896, two years after the city was incorporated. Voters of the 750-person community approved a $40,000 bond to buy local, private water companies who operated one or more shallow wells to serve the nearby residents. The city grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these sources. A 1950 engineering report noted, “the capricious alternation of well waters and the San Francisco Water Department water…has made satisfactory service to the average customer practically impossible”. By 1950, only eight wells were still in operation. Despite this, groundwater production increased in the 1950’s leading to lower groundwater tables and water quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that CPAU should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year contract with SFWD, and CPAU’s wells were placed in standby condition. The SFWD later became known as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire supply of potable water has come from the SFPUC. As the city grew, so did the number of mains in the water system, while existing sections of the system continued to age. In the mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier started to accelerate. In FY 1994, to combat deterioration of older sections of the system, CPAU performed an analysis of cost-effective system improvements and increased the rate of main replacement from one mile per year to three. CPAU began a plan to replace 75 miles of deficient mains within 25 years. In 1999, a study of system reliability concluded that the distribution system needed major upgrades to provide adequate water supply during a natural disaster. This ultimately resulted in the $40 million Emergency Water Supply and Storage Project, completed in 2013, which involved a new underground reservoir in El Camino Park, the siting and construction of several emergency supply wells, and the upgrade of several existing wells and the Mayfield pump station. Upon completion, the city began to focus reliability efforts on its system of water storage reservoirs and transmission lines in the Foothills. At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy Regional Water System, which crosses two major fault lines between the Sierras and the Bay Area. That evaluation concluded that major upgrades to the system were required. This planning process culminated in the SFPUC’s $4.8 billion Water System Improvement Project (WSIP), which is ongoing. This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. The majority of those costs, funded with bond financing, will be paid off over approximately 30 years. The SFPUC continues to evaluate its aging system for other needed infrastructure improvements; future major improvements include dam safety and Mountain Tunnel repairs. March 2020 15 | Page SECTION 4B: CUSTOMER BASE CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a handful of residential customers not in Palo Alto (primarily in Los Altos Hills). Approximately 20,100 customers are connected to the water system. Approximately 16,200 (81%) of these are separately metered residential customers and approximately 3,900 (19%) of these are commercial, master-metered residential, irrigation and fire service customers. Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is used for irrigation, and that consumption is heavily weather dependent. It also varies significantly by season. As a result of these two factors, there is significant variability in the amount of water that is demanded from the system month to month and year to year. SECTION 4C: DISTRIBUTION SYSTEM To deliver water to its customers, CPAU owns and operates roughly 233 miles of mains (which transport the water from the SFPUC meters at the city’s borders to the customer’s service laterals and meters), eight wells (to be used in emergencies), five water storage reservoirs (also for emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow and demand (due to fire suppression, heavy usage times, etc.). These represent the vast majority of the infrastructure used to distribute water in Palo Alto. SECTION 4D: COST STRUCTURE AND REVENUE SOURCES As shown in Figure 1, water purchase costs accounted for 43% of the Water Utility’s costs in FY 2019, Operational costs represented 33%, and capital investment was responsible for the remaining 24%. Staff projects these percentage distributions to remain similar over the forecast period. The Water Utility’s revenue is primarily from sales of water and the remainder from capacity and connection fees, interest on reserves, and other sources. Appendix A: Water Utility Financial Forecast Detail shows more detail on the utility’s cost and revenue structures. Approximately 19% of the utility’s revenues come from fixed service charges, though most of its costs are fixed. Figure 1: Cost Structure (FY 2019) 43% 33% 24% Supply Operations Capital Figure 2: Revenue Structure (FY 2019) 90% 10% Sales of Water Other Revenue March 2020 16 | Page SECTION 4E: RESERVES STRUCTURE CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The descriptions below summarize these reserves; see Appendix C: Water 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, as well as to manage cash flow for ongoing capital projects. This reserve can also act as a contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Rate Stabilization Reserve: This reserve is intended to be empty unless the city anticipates one or more large rate increases 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 Wastewater Collection) as well. • Operations Reserve: This is the primary contingency reserve for the Water Utility, and is used to manage yearly variances from the budget for operational water supply costs. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and is normally empty. SECTION 4F: COMPETITIVENESS Table 7 shows the current water bills for single-family residential customers compared to what they would be under surrounding communities’ rate schedules. CPAU is among the highest monthly bills of the group, although bills for smaller water users are less than in some surrounding communities. These comparison cities were selected because they are the cities CPAU compares itself to in the annual budget across all industries. March 2020 17 | Page Table 7: Single-Family Residential Monthly Water Bill Comparison Usage (CCF/month) Residential monthly bill comparison ($/month)* As of January 2020 Palo Alto Menlo Park Mountain View Hayward Redwood City Santa Clara Los Altos 4 $46.89 $56.69 $37.92 $37.20 $54.04 $43.69 $41.26 (Winter median) 7 $70.28 $85.35 $58.74 $54.60 $72.43 $62.44 $59.17 (Annual median) 9 $90.42 $104.46 $72.62 $67.54 $85.91 $74.94 $71.10 (Summer median) 14 $140.77 $150.03 $107.32 $103.24 $122.66 $106.19 $99.75 25 $251.54 $249.10 $225.26 $181.78 $217.76 $174.94 $167.27 * Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC. SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION 5A: LOAD FORECAST Figure 4 shows 40 years of water consumption history. Average water use has trended downward over time even as Palo Alto’s population has grown. Significant water use reductions over the 40- year history were in response to requests to reduce water use in the 1976-77 and 1988-92 drought periods. During these periods, customers invested in efficient equipment and modified behavior to achieve water reduction goals. Reductions in usage achieved during these drought periods endured even after those periods. More recently, water sales decreased substantially during the 2007-2009 recession and during the 2014-2017 drought. Usage has started to return to pre-drought levels, though the level at which usage will finally plateau is unknown. March 2020 18 | Page Figure 3: Historical Water Consumption Figure 4 shows the forecast of water consumption through FY 2025 and beyond, as denoted by the dotted line. Figure 4: Forecast Water Consumption March 2020 19 | Page During the recent drought, the State mandated a 24% water use restriction for Palo Alto until May 2016. Customers continue to conserve, but water usage has been increasing. Based on patterns experienced in previous droughts, this forecast assumes consumption will only rebound by 50% of the difference between pre-drought and drought levels, then resume with the previous trend of decreasing usage over time. SECTION 5B: FY 2015 TO FY 2019 COST AND REVENUE TRENDS Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs have changed during the last five years as well as how staff projects they will change over the next decade. The annual expenses for the water utility rose substantially between 2015 and 2019. The increases were primarily related to water purchase costs, which increased 35% from $15.7 million in FY 2015 to $21.2 million in FY 2019. Section 6A: Water Purchase Costs contains a more in-depth discussion of water purchase costs. Operations costs have remained fairly steady since FY 2015, increasing by about 6%, while CIP costs have generally increased but fluctuated down in certain years. For example, in FY 2017, a water main replacement project that CPAU put out for bid resulted in very few contractors competing, and project bids that were higher than budgeted. This led to delays due to the changing market conditions and rising CIP costs. March 2020 20 | Page Figure 5: Water Utility Expenses, Revenues, and Rate Changes: Actual Expenses through FY 2019 and Projections through FY 2025 SECTION 5C: FY 2019 RESULTS Actual revenues for FY 2019 were very close to projected ($49.4 million vs. $49.6 million). Operating costs were lower during FY 2019, mainly due to deferrals of capital spending, savings in water purchases due to sales volumes below projected, and savings in operations and maintenance costs. Table 8 summarizes the variances from forecast. Table 8: FY 2019, Actual Results vs. Financial Plan Forecast Net Cost/ (Benefit) (000) Type of change Deferrals of capital spending $ (1,903) Cost savings Water purchases lower than expected $ (1,401) Cost savings Operations and Maintenance costs lower than expected $ (1,434) Cost savings Net Cost / (Benefit) of Variances $ (4,739) SECTION 5D: FY 2020 PROJECTIONS Estimated sales revenues are expected to be slightly lower than forecasted in the FY 2020 Financial Plan by about $0.6 million. This is because of the updated sales forecast that takes into account the lower actual water sales in FY 2019. However, interest income was higher in FY 2019 March 2020 21 | Page and the updated projection for FY 2020 brings up the overall revenue forecast to $1.3 million higher than projected in FY 2020. On the expense side, the most notable change from the FY 2020 Financial Plan is changes to CIP expenditures. Approximately $13.7 million in projects budgeted in FY19 or earlier are slated to be re-appropriated to FY2020, the largest being main replacement project 27, estimated at $7.1 million, and some seismic water system upgrades, estimated at $2.9 million. The FY 2020 Financial Plan estimated the CIP expenditure for FY 2020 to be $16.9 million while the current estimated CIP expenditure for FY 2020 is $20.8 million, of which $5.1 million will be funded through rate revenue, $13.7 will be funded through reappropriations and $1.3 million through committed funds. Table 9 below shows the difference between the $16.9 million projected in last year’s Financial Plan and the $5.1 million projected in this year’s Financial Plan as the delay of capital project spending. Operations & Maintenance expense decreases are anticipated from lower than expected budgets. Table 9 summarizes the changes from the FY 2020 forecast. Table 9: FY 2020 Change in Projected Results, 2020 Forecast vs 2021 Forecast Net Cost/ (Benefit) Type of Change Sales Revenue 588 Revenue decrease Other Revenue (Including Interest Income) (1,935) Revenue increase Higher Total Revenue ($1,348) Revenue increase Delay of Capital Project Spending budgeted in FY 2019 ($11,812) Cost decrease Operations & Maintenance Costs ($1,131) Cost decrease Lower Total Expense ($12,943) Cost decrease Net Cost / (Benefit) of Variances ( $14,291) SECTION 5E: FY 2021 – FY 2025 PROJECTIONS Figure 5 above shows that on average the costs for the Water Utility are increasing through the rest of the forecast period, though mainly after FY 2022 based on current estimates from the SFPUC. Water supply costs are the largest component, and are generally projected to grow by about 3.4 percent on average over the forecast period. Operations and capital investment costs are also expected to increase at the same rate of inflation used in the City’s long-term financial plans (3% to 5% per year), which also take into account higher estimated pension costs. While future CIP costs have been revised upwards to reflect the higher construction costs seen in recent projects, there is still uncertainty with regard to the utility’s future costs for main replacement. See Section 6: Details and Assumptions for more detail on the costs that make up these projections, as well as the various assumptions underlying the projections. As shown in Figure 5, above the Water Utility requires rate increases of between 0% and 4% per year through FY 2025 to provide sufficient revenues to fund annual expenses. This forecast assumes the use of the Rate Stabilization Reserve annually beginning in FY 2024 to spread the series of large water supply rate increases expected from the SFPUC over multiple years. In addition, the CIP Reserve is used to assist in funding Capital Improvements going forward as well as in stabilizing rates. Annually, beginning in FY 2021, a fixed funding amount ($8 million in FY 2021 and $8 million in FY 2022 – FY 2025, plus annual inflation), will be provided from the Operations Reserve to the March 2020 22 | Page CIP Reserve to fund capital improvements. Table 3 shows this capital program contribution to the CIP Reserve in rows 9 and 10. This amount is an estimate of the amount of CIP work there is in a given year, spread out over the forecast period. It was derived by calculating the approximate average annual CIP budget for FY 2021 through FY 2025 less an allowance for unspent funds and excluding the one-time reservoir replacement costs. The reservoir replacement costs will be funded through the one-time transfers of $3 million in FY 2020, $1.5 million in FY 2021 and $3.5 million in FY 2022 from the Operations Reserve to the CIP Reserve. Table 3 shows these transfers in row 8. This approach will provide stability to the Operations Reserve by providing for a steady funding stream for CIP work and by reflecting fluctuations due to CIP such as project delays or accelerations in the CIP Reserve; ultimately, this stability should provide more stable customer rates. The use of the CIP Reserve in this way will isolate fluctuations due to CIP delays or accelerations and allow those to be viewed together in the CIP Reserve. Conversely, other trends or factors affecting the Operations Reserve will be easier to identify and communicate in that reserve. Without this change, the relative stability of total costs, and revenues shown in Figure 5 would fluctuate greatly from year to year as shown below in Figure 6. Figure 6: Water Utility Expenses, Revenues, and Rate Changes: Actual Expenses through FY 2019 and Projections through FY 2025 Note that the fluctuations in CIP show a mismatch in many forecasted years between revenues and costs. Isolating fluctuations in capital investment in the CIP Reserve not only helps to ensure adequate funding for needed capital improvements but also shows a more realistic view of the relationship between costs and revenues as shown in Figure 5. March 2020 23 | Page Figure 7 below shows reserves trends based on these cost and revenue projections. The figure shows credits to the Rate Stabilization Reserve in FY 2020 and FY 2021 and the contributions from the Rate Stabilization Reserve to the Operations Reserve in FY 2024 and FY 2025. Staff projects transfers from the Operations Reserve to the CIP Reserve of $3 million in FY 2020, $1.5 million in FY 2021 and $3.5 million in FY 2022. This estimate decreased from the recommended level in the FY 2020 Financial Plan of $5 million in FY 2020 and $4 million in FY 2021. In the FY 2020 Financial Plan no transfer to the CIP Reserve was planned for FY 2022. Assuming the projected increases in revenue, staff expects the Operations Reserve, the main contingency reserve, to be within the target range by the end of FY 2022 and for the remainder of the forecast period, and that this reserve will be adequate to meet all identified risks, as discussed in Section 5F: Risk Assessment and Reserves Adequacy. In addition, the Unassigned Reserve reflects reserve funds in the Operations Reserve above the maximum guideline level. With the expected increase in costs in FY 2020 and FY 2021 and with the infusion of funds to the CIP Reserve and Rate Stabilization Reserve, these excess reserves will be utilized by the end of FY 2022 and must be used before Rate Stabilization Reserve funds are utilized. In accordance with the Water Utility Reserves Management Practices, this Financial Plan includes a plan to assign these funds to both rate stabilization and capital investment purposes. Figure 7: Water Utility Reserves Actual Reserve Levels for FY 2019 and Projections through FY 2025 March 2020 24 | Page SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY The Water Utility currently has one contingency reserve, the Operations Reserve, and this Financial Plan proposes using funds and raising rates slowly such that reserves remain well within the guideline levels throughout the forecast period, as shown in Figure 8. Staff will consider funds in the Operations Reserve in excess of the maximum as of the end of FY 2020 to be unassigned. The Operations Reserve is projected to exceed both the minimum reserve level and the short term risk assessment level throughout the forecast period. Figure 8: Operations Reserve Adequacy Table 10 summarizes the risk assessment calculation for the Water Utility through FY 2025. The risk assessment includes the revenue shortfall that could accrue due to lower than forecasted sales revenue. Because of the proposal in this Financial Plan for an annual capital contribution to the CIP Reserve, staff proposes to change the water risk assessment by reflecting the risk of increased CIP expenditures in the CIP Reserve instead of in the Operations Reserve. Specifically, the risk assessment calculation previously included an estimate for an increase of 10% of planned system improvement CIP expenditures for the budget year. The revised calculation shown below does not include that component because the CIP risk is being captured in the CIP Reserve. March 2020 25 | Page Table 10: Water Risk Assessment ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Total non-commodity revenue $25,985 $27,018 $26,471 $25,495 $25,970 Max. revenue variance, previous ten years 13% 13% 13% 13% 13% Risk of revenue loss $2,386 $2,481 $2,431 $2,341 $2,385 Total Risk Assessment value $2,386 $2,481 $2,431 $2,341 $2,385 SECTION 5G: ALTERNATE SCENARIO There is no alternate scenario presented in this Financial Plan. SECTION 5H: LONG-TERM OUTLOOK CPAU has put its Water Utility on strong footing by investing in its distribution system infrastructure and emergency water facilities over the last 20 years. The Water System Master Plan, recently completed and under review, will give CPAU a better picture of the long-term outlook for its infrastructure and will result in a plan for an appropriate schedule for infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has replaced and seismically strengthened its water transmission infrastructure, which will benefit Palo Alto and all Hetch Hetchy Regional Water System customers over the long term. The opportunities for CPAU’s Water Utility to obtain additional supplies over the long term may be in alternative water supplies such as recycled water, groundwater, and water from Valley Water. These alternatives have been analyzed in the past, and were analyzed again most recently in the 2017 Water Integrated Resource Plan4. Some of these alternatives may provide cost savings or increased drought protection. For example, in November, 2019, the City of Palo Alto entered into an agreement with Valley Water and the City of Mountain View that will provide (1) funding for a salt removal facility at the Regional Water Quality Control Plant in Palo Alto to improve the quality of non-potable recycled water used in Palo Alto and Mountain View, (2) a transfer of treated wastewater from Palo Alto to Valley Water for use in the county south of Mountain View, and (3) Palo Alto and Mountain View will have a future option to request new potable or non-potable water supply from Valley Water if needed. Climate change may begin to present challenges for the Water Utility over the next 20 to 40 years. Availability of water from SFPUC’s Regional Water System may change with changing seasonal precipitation patterns. Water consumption patterns may change. Consumption could increase due to drier weather or decrease as customers become even more focused on water conservation. Droughts may become more frequent. The risk of wildfire in the foothills could increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level 4 2017 Water Integrated Resource Plan: https://www.cityofpaloalto.org/civicax/filebank/documents/56088 March 2020 26 | Page rise could result in greater exposure of utility infrastructure to inundation, possibly resulting in higher maintenance and replacement costs. As part of the Sustainability/Climate Action Plan, CPAU is currently working on a Climate Change Adaptation Roadmap that will begin to assess some of these risks. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: WATER PURCHASE COSTS CPAU purchases all of its potable water supplies from the SFPUC, which owns and operates the Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water from the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA member agencies. The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the high Sierra in Yosemite County and water is transported by a gravity-fed pipeline to the Bay Area. Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities that transport water to the Bay Area. As of December 31, 2018, nearly 96% of the WSIP regional projects are complete.5 This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. The currently estimated WSIP completion date is December 30, 2021, as adopted by the SFPUC in March of 2018. In large part because of these WSIP-related debt service costs, the SFPUC’s wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY 2019, and is forecast to increase to slightly more than $5 per CCF by FY 2024 (these projections are subject to change based on future SFPUC budget estimates). Figure 9 shows the SFPUC’s actual wholesale water rate since FY 2009 and a projection through FY 2024 and beyond. Note that the wholesale water rate decreased in FY 2014, but the apparent rate decrease is due to a debt the BAWSCA agencies owed to SFPUC being directly paid by the BAWSCA agencies via bond financing. This cost is in addition to the wholesale water rate and adds about $0.35 to $0.45 per CCF to the wholesale rate. Parts of SFPUC’s system not included in the WSIP will also need rehabilitation after the WSIP is completed, and some of these projects are already included in the SFPUC’s rate projections, such as additional Transmission, Supply & Storage and Treatment system upgrade projects, particularly dam safety work slated to occur during the next 10 years. The SFPUC is also conducting condition assessments of other “up-country” facilities, located in the Sierras, in the coming years. Current estimates are that $1.8 billion will be needed between FY 2019 and FY 2028 primarily for these non-WSIP projects, but if these assessments identify other facilities that need replacement, it may result in additional rate increases as new debt is issued to finance the projects. 5 Second Quarter FY 2018-19 WSIP Regional Quarterly Report, http://www.sfwater.org/index.aspx?page=307 March 2020 27 | Page In January 2020, the SFPUC provided an informal estimate for FY 2021 wholesale water rates to remain at $4.10 per CCF. However, there is uncertainty surrounding the level of continued water usage by the BAWSCA agencies as staff continues to analyze the drought rebound level. Sales have been increasing on average since the end of the drought in 2017. If that trend continues in upcoming years, rate projections may level out. However, if snow and rain do not materialize in future years further calls for restricted usage may reoccur. Figure 9: Historical and Projected SFPUC Wholesale Water Rate During FY 2017 through FY 2019, the balancing account for SFPUC’s wholesale customers built up an over-collection of revenue due to wholesale customer revenues exceeding costs. This is because SFPUC sold more wholesale water than its sales projection used for rate setting. Additional reasons for the balancing account balance are the cost savings in the wholesale revenue requirement due to the SFPUC’s debt refinancing, and credits applied to the balancing account due to BAWSCA’s annual review of the wholesale revenue requirement calculations. These balancing account funds will be refunded approximately between FY 2021 and FY 2023, which allows some rate stabilization of SFPUC’s wholesale rates. If it weren’t for this rate stabilization effect of the balancing account, Palo Alto would pay higher rates in FY 2021 for water purchased from SFPUC. SECTION 6B: OPERATIONS CPAU’s Water Utility operations include the following activities: • Administration, a category that includes charges allocated to the Water Utility for administrative services provided by the General Fund and for Utilities Department administration, as well as debt service and other transfers. Additional detail on Water Utility debt service is provided in Section 6D: Debt Service March 2020 28 | Page • Customer Service • Engineering work for maintenance activities (as opposed to capital activities) • Operations and Maintenance of the distribution system; and • Resource Management Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of the work associated with each of these activities. From FY 2015 to FY 2019, overall Operations costs increased 2% per year on average (see Figure 10). Operations and Maintenance costs were the main driver, followed by Administration and Resource Management costs. Transfers have varied from year to year, but staff expect transfers to remain relatively low and stable through the forecast period. Staff project inflationary increases for all operations costs with underlying assumptions for salary and benefit costs, consumer price index, and other cost projections that match the City’s long-range financial forecast. Figure 10: Historical and Projected Operational Costs SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) The Water Utility’s CIP consists of the following types of projects: March 2020 29 | Page • One-time projects, or large, non-recurring replacement of system assets (such as reservoir rehabilitation). • Water main replacement, which represents the ongoing replacement of aging water mains and the services associated with those mains. • Ongoing projects, which represent the cost of replacing aging and under-recording meters and degraded boxes and covers, minor replacements of various types of distribution system equipment, and the cost of capitalized tools and equipment. • Customer connections, which represents the cost when the Water 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. Table 11 shows the FY 2020 projected budget and the five year CIP spending plan, although these figures are preliminary pending budget discussions starting in May. The ‘committed’ column represents funds committed to contracts for which work has not yet been completed or invoices paid. As mentioned earlier in this report, $13.7 million of funds in the Current Budget column will be carried over to FY 2021. Table 11: Budgeted Water Utility CIP Spending ($000) This budget does not include allocated overhead, which is estimated to be $0.83 million in 2020 and escalating at 2-4% annually thereafter as shown in the table below. Allocated overhead is shown below, and added to the capital budget as a capital expenditure. Table 12: Allocated Overhead FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Allocated Overhead $831,481 $851,636 $889,380 $914,372 $936,994 $960,456 The water main replacement program funds the replacement of deteriorating water mains or water mains in liquefaction zones. The water system consists of over 236 miles of mains, approximately 2,000 fire hydrants, and over 20,000 metered service connections spanning 9 pressure zones over a 26 square mile service area. In recent years, CPAU has already replaced many miles of the most leak-prone and deteriorated pipes. CPAU is currently pursuing a pipe replacement program of mains that are subject to recurring breaks based on maintenance history and 13.5 miles of mains that were identified in the 2016 water system study. CPAU also coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. The main replacement schedule in this financial plan will allow CPAU to replace these mains on schedule. Project Category Current Budget* Spending, Curr. Yr Remain. Budget**Committed FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 One Time Projects 6,117 (164) 5,953 384 2,000 - 3,500 - - Water Main Replacement 8,159 (294) 7,865 546 - 9,350 - 9,350 - Ongoing Projects 3,587 (349) 3,238 430 2,589 2,035 2,083 2,132 2,132 Customer Connections 750 (362) 388 11 775 800 825 850 850 TOTAL 18,613 (1,169) 17,444 1,372 5,364 12,185 6,408 12,332 2,982 *Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year **Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments). March 2020 30 | Page Costs for the water main replacement program are increasing for a variety of reasons: • Fire Code regulations now mandate fire sprinklers for new residential units. To accommodate increased fire flows, new main replacement projects require larger diameter pipe. • CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs for this material are slightly higher, though lifecycle costs are lower, and the material performs better. Joints in distribution mains are the most likely place for failure, and sections of HDPE pipe can be fused together rather than connected with fittings. In the long run, this will reduce losses and maintenance costs. • To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along with the water mains with new HDPE services. In the past, the existing services were reconnected, regardless of the material. This new practice costs more in the short run, but will provide long term benefits. • Lastly, costs have escalated after the recession. The regional and even national focus on infrastructure improvement has created labor shortages in the construction market, leading to higher bids than were seen in the past. These factors have created some uncertainty in future water main replacement costs. As bids for new projects, such as upgrades to University Avenue, have consistently come in higher over the last few years, future main replacement project budgets have been increased from prior year’s estimates to reflect expected bid estimates. If the cost of water main replacement continues to rise at its current levels, budgets may need to be revised further. In 1993, the long term water main replacement program focused on replacing the oldest and most degraded parts of the system. Roughly 25% of the system has been replaced, and the rate of water leaks has decreased 50%. CPAU initiated a master planning process in FY 2015 that was completed in 2016 to evaluate the current state of the distribution system and determine the necessary rate of main replacement in the next 20 years. This study factored in seismically vulnerable mains as well as the remaining old mains. Mains with recurring maintenance issues are added to projects as they are identified. Preparing for the future, CPAU is in the process of evaluating the utility’s asbestos cement pipe (ACP) mains. Over half the mains in the system are ACP. The ACP pipe has performed very well, but CPAU wants to verify its life expectancy and plan for its future replacement in 20 to 30 years. This financial plan addresses these challenges in a way that will allow CPAU to meet its main replacement needs. This financial plan includes approximately $8.5 million every other year for main replacement construction instead of $5.7 million annually. This shift to larger main replacement construction projects every other year will allow CPAU to meet its main replacement needs while attracting more contractors to bid on the larger projects. Additionally, this main replacement project schedule for water will be staggered with wastewater and gas (water and wastewater construction every even year and gas construction every odd year), which will ease scheduling difficulties for inspection coverage due to shared inspection staff across water, wastewater, and gas utilities. Included in the one-time project budget are seismic water system upgrades and/or replacement for the Corte Madera, Park, Boronda and Dahl reservoirs to improve earthquake resistance. This work will improve protection from water loss at these reservoirs in a seismic event. If an March 2020 31 | Page earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss of water storage for drinking, property damage from flooding or mudslides, and environmental damages. Work has begun on this design of Corte Madera reservoir replacement project in 2019 and staff estimates the construction work and design for the replacement for Dahl and Park reservoirs will cost an additional $2 million in FY 2021. AMI projects are now planned to begin in 2024 and will be included as an inter-fund transfer to the electric fund, or a loan payment to the Electric Special Projects Reserve. One project not included in this forecast is protecting the large water transmission line in the foothills from seismic events. Staff has engaged a consultant to investigate alternatives for this project. The consultant is analyzing an alternative that involves installing a valve and hose system that could be used to bypass breaks in the line while they are repaired after an earthquake. This is a relatively low-cost alternative that would not substantially affect the financial forecast. However, storing and maintaining several thousand feet of hose was not an ideal solution, since multiple breaks could be a possibility. The alternative to the future replacement of the transmission line is to move storage to locations that are not dependent on the transmission line or replace the transmission lines with a pipe that is more earthquake resistant (HDPE). CPAU has already replaced two tanks in the foothills and have to maintain fire service to the area, so replacement is a more likely option. To date the concrete cylinder pipe has performed well and is not in need of immediate replacement. Once the storage issues are addressed, the focus will be to address the transmission main replacement. It could cost between $15 million and $20 million, which would likely require bond financing and would substantially affect the financial forecast. Ongoing Projects and Customer Connections are projected to cost approximately $2.9 million in FY 2021 and increase to approximately $3 million per year through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective meters are discovered and replaced during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of water services. It is worth noting that property owners pay a fee for water service replacement or expansion during redevelopment, so when the number of projects go up (meaning higher costs for this activity), so does fee revenue. Aside from customer connections, the CIP plan for FY 2021 to FY 2025 is funded by revenue from utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program (CIP) Detail shows the details of the plan. Figure 11 below shows the projected CIP Reserve balances from FY 2021 through FY 2025. Figure 12 below shows the projected CIP expenditure fluctuating from year to year with the staggered main replacement schedule, relative to the more steady capital program contributions to the CIP Reserve. In FY 2021, the capital program contribution to the CIP Reserve is $8 million. The capital program contribution increases with inflation at a projected level of 3%. Appendix A: Water Utility Financial Forecast Detail shows the amount of the capital program contributions under “Expenses” for FY 2021 through FY 2025. March 2020 32 | Page Figure 11: Projected CIP Reserve Balances FY 2021 to FY 2025 Figure 12: Projected CIP Expenditure,and Projected Capital Program Contribution,FY 2021 to FY 2025 March 2020 33 | Page SECTION 6D: DEBT SERVICE The Water Utility’s annual debt service is roughly $3.2 million per year. This is associated with two bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in compliance with all covenants on both bonds. The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new wells, and rehabilitation of existing wells and tanks) which will be retired by 2035. As part of the ‘Build America’ bond program, there is an interest payment subsidy from the Federal Government of 35%. There is always the possibility that the federal government will choose to stop offering this subsidy. The automatic federal spending cuts under the Budget Control Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts through 2021 proceed without amendment, staff estimates that the subsidy would be reduced by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy, and actually extended the automatic cuts through 2023. The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8 million. Table 13 shows the cost of debt service for the Water Utility’s share of these bond issuances for the financial forecast period: Table 13: Water Utility Debt Service ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 2009 Water Revenue Bonds, Series A (net of grants) 2,097 2,114 2,132 2,151 2,151 2011 Utility Revenue Bonds, Series A 654 656 657 658 658 Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available Reserves shall be at least 5 times the maximum annual debt service. Note that “Available Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not just the Water system. This Financial Plan maintains compliance with these covenants throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail. The net revenues (but not the reserves) of the Water Utility are also pledged for one other bond as shown in Table 14 below, even though the Water Utility is not responsible for the debt service payments. The Water Utility’s reserves or net revenues would only be called upon if the responsible utilities are unable to make their debt service payments. Staff does not currently foresee this occurring. Amounts advanced from one utility to pay debt service for another utility would be repaid by the borrowing fund. March 2020 34 | Page Table 14: Other Issuances Secured by the Water Utility’s Revenues or Reserves Bond Issuance Responsible Utilities Annual Debt Service ($000) Secured by Water Utility’s: Net Revenues Reserves 1995 Series A Utility Revenue Bonds Storm Drain $680 Yes No SECTION 6E: OTHER REVENUES The Water Utility receives most of its revenues from sales of water. The next largest source in FY 2019 was interest income, which was higher than forecasted and represented 45% of revenue from sources other than water sales; connection and capacity fees represented 37% of revenue from sources other than water sales. The remainder consisted of a variety of miscellaneous charges, transfers, and grants. Revenues from connection and capacity fees have more than doubled since FY 2009. Connection fees are charged to new developments that need new or replacement service connections, while capacity fees are charged to development that put additional demands on the water distribution system. Revenue from these sources decreased slightly during the recession, but increased substantially since then. Staff is forecasting revenue from these sources to increase at an average of 2% per year in subsequent years. Other revenue sources are projected to stay stable through the forecast period, though interest income always fluctuates depending on changes in interest rates. Some uncertainty also exists related to the Federal government’s commitment to continuing to pay the interest subsidy on the Build America Bonds. SECTION 6F: SALES REVENUES Staff based the sales revenue projections on the load forecast in Section 5A: Load Forecast and the projected rate changes shown in Figure 5. Except where stated otherwise, these load forecasts are based on normal precipitation. Precipitation can vary substantially, and this can affect revenues substantially. In dry years customers use more water, increasing revenues, and in wet years they use less. One factor that is difficult to predict is customer usage recovery post- drought. It appears that customer irrigation usage has resumed, although total usage has not reached pre-drought levels. FY 2019 usage levels were lower than FY 2018 usage levels across commercial, residential and irrigation customer classes. This may be due to normal weather variations rather than an indication of stabilizing post-drought usage levels. It remains uncertain whether the ongoing pattern of usage declines will continue at the same levels seen before the drought occurred. Staff will continue to monitor these patterns and adjust projections accordingly. SECTION 7: COMMUNICATIONS PLAN In FY 2021, the communications focus for water utility rates will continue to be on cost drivers for any rate increases, what CPAU is doing to keep costs down, and the value of our customers’ investment through their rates. One of the main reasons for water utility rate increases over the past decade has been the infrastructure costs from the Water System Improvement Program March 2020 35 | Page (WSIP), which raised rates for all San Francisco Public Utilities Commission (SFPUC) customers. Rising costs from our wholesale water supplier increase costs to CPAU, which must be recovered through rates. Additionally, CPAU has made improvements in the local water distribution system through capital projects to replace, upgrade or maintain the infrastructure. Market economics have continued to drive up labor and material costs for such projects. As a not for profit, public utility, CPAU must recover its costs through revenue generated by rates. Staff maintain a dedicated webpage at cityofpaloalto.org/ratesoverview to provide an overview on all utility rates, including information on costs, utilities supply resources, infrastructure projects, and the value of what customers get for what they pay. Outbound marketing and communication channels include bill inserts, web content, email newsletters, online videos, print and digital ads, presentations to customer groups and social media. For all utility outreach, while print materials and webpages still feature prominently, CPAU is placing more emphasis on digital advertising content, direct mail, and in-person attendance at community outreach events, festivals, and safety and emergency preparedness fairs. For the water utility, CPAU will continue its outreach on making water conservation a way of life, regardless of drought or rain conditions, which is in line with the State of California’s current outreach campaign. CPAU promotes available water use efficiency rebates, incentives and easy water-saving behaviors. Messaging reinforces the importance of water use efficiency, and that although rates are increasing, efficient usage can help customers avoid seeing a significant water cost increase on the utility bill. The City is also exploring opportunities to expand water reuse, such as through recycled water, to further reduce demands on potable water supplies. To keep customers apprised of the status and accomplishments of capital improvement projects, CPAU maintains a network of project webpages at cityofpaloalto.org/utilityprojects Safety topics are also emphasized year-round. The communications team will provide rates information to internal and external stakeholders including City staff who may interact with the public, the City Manager’s Office, Utilities Advisory Commission (UAC), City Council, business and residential customers. Rates communications will include a substantial update to the web, discussion in the Proposition 218 public hearing notice, utility bill inserts, educational updates to Customer Service staff, and addition of a “breaking news” page on the Utilities home website. Other communication methods will involve updates to financial plans, presentations to UAC, Finance Committee, City Council and any media coverage provided as a result of any rate increases. WATER UTILITY FINANCIAL PLAN March 2020 36 | Page APPENDICES Appendix A: Water Utility Financial Forecast Detail Appendix B: Water Utility Capital Improvement Program (CIP) Detail Appendix C: Water Utility Reserves Management Practices Appendix D: Description of Water Utility Operational Activities Appendix E: Sample of Water Utility Outreach Communications APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL 1 FISCAL YEAR FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 2 3 WATER SUPPLY 4 Purchases (CCF)5,507,153 4,671,433 4,127,085 4,172,038 4,859,576 4,600,987 4,730,282 4,659,327 4,589,437 4,520,596 4,452,787 4,385,995 5 Sales (CCF)5,047,148 4,433,016 3,858,825 3,852,185 4,609,893 4,411,473 4,511,342 4,443,672 4,377,017 4,311,361 4,246,691 4,182,991 6 7 BILL AND RATE CHANGES 8 Variable Charge (Supply)25%22%9%7%-6%0%0%0%0%9%13%5% 9 Residential Variable Charge (Distribution)-16%15%5%-2%-4%4%0%2%5%0%-2%4% 10 System Average Rate 0%14%7%2%1%1%0%0%3%3%4%4% 11 Average Customer Bill (projected)1%0%3%3%4%4% 12 13 STARTING RESERVES 14 Reappropriations (Non-CIP)- - - - - - 258,000 258,000 258,000 258,000 258,000 258,000 15 Commitments (Non-CIP)2,000 347,000 347,000 177,273 177,273 284,034 442,000 442,000 442,000 442,000 442,000 442,000 16 Restricted for Debt Service 3,225,000 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 17 Emergency Plant Replacement 1,000,000 1,000,000 - - - - - - - - - - 18 Reappropriations & Commitments 10,423,000 10,847,000 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333 19 Capital Reserve - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 9,466,020 8,600,934 9,889,525 5,851,185 20 Rate Stabilization Reserve 17,272,000 20,133,000 6,567,000 1,877,437 4,069,437 4,069,437 4,069,437 9,069,437 12,569,437 12,569,437 12,569,437 9,500,000 21 Operations Reserve - - 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 12,126,287 11,332,404 11,888,718 22 Unassigned - - - - 7,056,052 7,182,707 8,357,649 5,861,621 1,281,096 - - - 23 TOTAL STARTING RESERVES 31,922,000 35,658,000 35,549,836 33,216,828 43,289,806 42,589,274 46,498,038 44,268,893 47,422,134 44,186,991 44,681,700 38,130,237 24 25 REVENUES 26 Net Sales 39,029,262 33,654,549 36,136,644 41,657,382 44,078,960 44,134,246 44,905,506 44,204,516 44,963,993 45,738,009 46,978,598 48,252,866 27 Other Revenues and Transfers In 4,053,920 7,504,848 3,258,936 5,829,851 4,116,200 5,218,976 5,299,292 5,361,211 5,423,739 5,486,826 5,574,801 5,664,347 28 TOTAL REVENUES 43,083,182 41,159,397 39,395,579 47,487,233 48,195,160 49,353,223 50,204,798 49,565,727 50,387,732 51,224,835 52,553,399 53,917,213 29 30 EXPENSES 31 Water Purchases 15,705,288 15,669,935 17,626,020 20,075,322 21,957,711 21,210,399 21,662,358 21,371,446 21,084,897 22,470,747 24,794,443 25,632,532 32 Operating Expenses 679.9%2.9%5.8% -54.7% 33 Administration 34 Allocated Charges 2,366,077 2,342,985 2,953,291 3,151,373 2,809,112 2,626,526 2,759,271 2,826,156 2,951,411 3,034,346 3,109,415 3,187,275 35 Rent 2,192,454 2,249,457 1,803,087 1,720,711 1,775,774 1,832,599 1,880,246 2,305,182 2,365,116 2,426,609 2,489,701 2,554,434 36 Debt Service 3,220,208 3,218,869 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,834,553 3,834,553 3,834,553 37 Transfers and Other Adjustments 335,808 63,612 (377,200) (256,608) 393,607 438,322 447,088 456,030 465,151 474,454 483,943 493,622 38 Subtotal, Administration 8,114,546 7,874,923 7,601,785 7,834,792 8,201,161 8,118,304 8,307,243 8,810,210 9,005,241 9,769,961 9,917,612 10,069,883 39 Resource Management 570,040 488,331 592,744 868,038 922,558 963,976 1,038,462 1,075,972 1,122,949 1,160,062 1,192,973 1,225,207 40 Operations and Mtc 4,986,274 5,283,426 5,038,570 5,290,549 5,725,236 5,964,589 6,420,642 7,650,244 7,984,407 8,247,094 8,480,157 8,708,782 41 Engineering (Operating)381,502 358,128 282,472 355,852 354,597 383,877 407,321 419,100 437,566 450,715 462,510 474,452 42 Customer Service 1,677,926 1,821,447 2,076,559 1,616,008 1,625,332 1,620,421 1,764,007 1,836,613 1,916,285 1,983,643 2,042,974 2,099,891 43 Allowance for Unspent Budget - - - - - (427,929) (458,667) (511,175) (533,555) (550,704) (565,963) (581,051) 44 Subtotal, Operating Expenses 15,730,288 15,826,254 15,592,128 15,965,239 16,828,885 16,623,240 17,479,008 19,280,964 19,932,892 21,060,771 21,530,262 21,997,163 45 Capital Program Contribution^8,335,605 8,580,372 9,082,021 4,110,131 8,169,097 11,791,292 5,132,404 8,000,000 8,240,000 8,487,200 8,741,816 9,004,070 46 TOTAL EXPENSES 39,771,182 40,076,561 42,300,170 40,150,692 46,955,693 49,624,930 44,273,771 48,652,410 49,257,790 52,018,717 55,066,522 56,633,765 47 9.04 48 ENDING RESERVES 49 Reappropriations (Non-CIP)- - - - - 258,000 258,000 258,000 258,000 258,000 258,000 258,000 50 Commitments (Non-CIP)347,000 347,000 177,273 177,273 284,034 442,000 442,000 442,000 442,000 442,000 442,000 442,000 51 Restricted for Debt Service 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 52 Emergency Plant Replacement 1,000,000 - - - - - - - - - - - 53 Reappropriations & Commitments 10,847,000 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333 54 Capital Reserve - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 9,466,020 8,600,934 9,889,525 5,851,185 7,479,328 55 Rate Stabilization Reserve 20,133,000 6,567,000 1,877,437 4,069,000 4,069,437 4,069,437 9,069,437 12,569,437 12,569,437 12,569,437 9,500,000 6,500,000 56 Operations Reserve - 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 13,215,248 12,126,287 11,332,404 11,888,718 12,172,166 57 Unassigned - - - 7,056,052 7,182,707 8,357,649 5,861,621 1,281,096 - - - - 58 TOTAL ENDING RESERVES 35,658,000 35,549,836 33,216,828 43,289,369 42,589,274 46,498,038 31,547,487 47,422,134 44,186,991 44,681,700 38,130,237 37,041,828 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to meet its debt covenants. ^ Capital Reserve Contribution represents levelized amount of CIP funding for the Capital reserve beginning in FY 2021 Appendix A (continued) 1 FISCAL YEAR FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 2 3 REVENUES 4 Net Sales 91%82%92%88%91%89%89%89%89%89%89%89% 5 Other Revenues and Transfers In 9%18%8%12%9%11%11%11%11%11%11%11% 6 TOTAL REVENUES 100% 100%100%100%100%100%100%100%100%100%100%100% 7 8 EXPENSES 9 Water Purchases 39%39%42%50%47%43%49%44%43%43%45%45% 10 Operating Expenses 11 Administration 12 Allocated Charges 6%6%7%8%6%5%6%6%6%6%6%6% 13 Rent 6%6%4%4%4%4%4%5%5%5%5%5% 14 Debt Service 8%8%8%8%7%6%7%7%7%7%7%7% 15 Transfers and Other Adjustments 1%0%-1%-1%1%1%1%1%1%1%1%1% 16 Subtotal, Administration 20%20%18%20%17%16%19%18%18%19%18%18% 17 Resource Management 1%1%1%2%2%2%2%2%2%2%2%2% 18 Operations and Mtc 13%13%12%13%12%12%15%16%16%16%15%15% 19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1% 20 Customer Service 4%5%5%4%3%3%4%4%4%4%4%4% 21 Allowance for Unspent Budget 0%0%0%0%0%-1%-1%-1%-1%-1%-1%-1% 22 Subtotal, Operating Expenses 40%39%37%40%36%33%39%40%40%40%39%39% 23 Capital Program Contribution 21%21%21%10%17%24%12%16%17%16%16%16% 24 TOTAL EXPENSES 100% 100%100%100%100%100%100%100%100%100%100%100% 25 26 RISK ASSESSMENT DETAIL 27 Distribution Revenue Variance 1,684,153 1,826,395 1,877,534 1,877,534 1,638,217 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662 28 10% CIP Program Contingency 858,037 908,202 411,013 816,910 1,179,129 - - - - - - 29 Total Risk Asssessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662 30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 12,126,287 11,332,404 11,888,718 12,172,166 31 Operations Reserve, % of Risk Value 459%534%556%510%436%525%554%489%466%508%510% 32 33 OPERATIONS RESERVE 34 Min (60 days of non-capital expenses)- 5,230,611 5,145,323 6,320,551 6,704,783 6,585,497 6,807,792 7,063,654 7,131,338 7,552,327 8,019,411 8,242,017 35 Target (90 days of non-capital expenses)- 9,395,240 8,698,557 9,527,750 10,222,892 9,439,924 9,764,599 10,139,451 10,231,856 10,854,037 11,545,173 11,869,404 36 Max (120 days of non-capital expenses)- 13,559,870 12,251,790 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 13,332,374 14,155,747 15,070,936 15,496,791 37 Risk Assessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662 38 39 DEBT SERVICE COVERAGE RATIO 40 Net Revenues (125% of Debt Service)876%878%931% 1020% 1104% 1075% 1115% 1161% 1172% 1035% 1108% 1142% 41 Available Reserves (5x Debt Service)*9.9 9.9 9.2 12.4 12.1 13.2 12.5 13.5 12.5 10.6 8.9 8.6 42 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to meet its debt covenants. WATER UTILITY FINANCIAL PLAN March, 2020 39 | Page APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL Project # Project Name Reappropriated / Carried Forward from Previous Years Current Year Funding Proposed Budget Amendments Spending, Current Year Remaining in CIP Reserve Fund Commitments FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 ONE TIME PROJECTSWS-07000 Regulation Station Imp.797,100 - - (17,861) 779,239 - - - - - - WS-07001 Water Recycling Facilities 395,649 - - (4,629) 391,020 - - - - - - WS-08001 Water Reservoir Coating 55,532 - - (12,795) 42,737 - - - - - - WS-09000 Seismic Water System 2,868,532 2,000,000 - (128,881) 4,739,651 383,656 2,000,000 - 3,500,000 - - WS-08002 Emergency Water Supply - - - - - - - - - - - Subtotal, One-time Projects 4,116,813 2,000,000 - (164,166) 5,952,647 383,656 2,000,000 - 3,500,000 - - WATER MAIN REPLACEMENT PROGRAM WS-12001 WMR- Project 26 505,400 - - (210,201) 295,199 546,315 - - - - - WS-13001 WMR - Project 27 7,068,638 - - (84,203) 6,984,435 1 - - - - - WS-14001 WMR - Project 28 585,107 - - - 585,107 - - 8,500,000 - - - WS-15002 WMR - Project 29 - - - - - - - 850,000 - 8,500,000 - WS-16001 WMR - Project 30 - - - - - - - - - 850,000 - Subtotal, Water Main Replacement Prog.8,159,145 - - (294,404) 7,864,741 546,316 - 9,350,000 - 9,350,000 - ONGOING PROJECTSWS-80014 Services/Hydrants - 400,000 - (82,054) 317,946 49,673 400,000 400,000 400,000 400,000 400,000 WS-80015 Water Meters 777,700 515,000 - (33,322) 1,259,378 - 530,450 546,364 562,755 579,638 579,638 WS-02014 W-G-W Utility GIS Data 280,222 456,177 - (130,324) 606,075 329,878 469,862 483,958 498,477 513,431 513,431 WS-13002 Equipment/Tools - 50,000 - - 50,000 - 50,000 50,000 50,000 50,000 50,000 WS-11003 Dist. Sys. Improvements 185,000 261,620 - (83,481) 363,139 48,851 269,469 277,553 285,880 294,456 294,456 WS-11004 Supply Sys. Improvements - 261,620 - (19,777) 241,843 1,707 269,469 277,553 285,880 294,456 294,456 WS-19000 Mayfield Reservoir 200,000 200,000 - (5,603) 200,000 PLC Upgrade 400,000 360,000 Subtotal, Ongoing Projects 1,442,922 2,144,417 - (348,958) 3,238,381 430,109 2,589,250 2,035,428 2,082,992 2,131,981 2,131,981 CUSTOMER CONNECTIONS (FEE FUNDED)WS-80013 Water System Extensions - 750,000 - (361,876) 388,124 11,424 775,000 800,000 825,027 850,000 850,000 Subtotal, Customer Connections - 750,000 - (361,876) 388,124 11,424 775,000 800,000 825,027 850,000 850,000 GRAND TOTAL 13,718,880 4,894,417 - (1,169,404)17,443,893 1,371,505 5,364,250 12,185,428 6,408,019 12,331,981 2,981,981 Funding Sources Connection/Capacity Fees 929,348 - 985,946 1,015,524 1,045,990 1,195,819 1,195,819 Other Utility Funds (Asset Mgmt, GIS Systems)295,260 - 268,418 295,260 304,118 313,242 322,640 Utility Rates 4,894,417 - 4,109,886 10,874,644 5,057,911 10,822,920 1,463,522 CIP-RELATED RESERVES DETAIL 6/30/2019 Actual 6/30/2019(Unaudited)Reappropriations (excl. Bond Funded)13,718,880 16,072,388 Commitments (excl. Bond Funded)1,067,702 1,371,505 WATER UTILITY FINANCIAL PLAN March, 2020 40 | Page APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Water 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, for the Water Utility Financial Plan delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is 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 Water 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 Water 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 Water 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. 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: WATER UTILITY FINANCIAL PLAN March, 2020 41 | Page 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 and approved by Council resolution. Minimum Level 20% of the maximum CIP Reserve guideline level Maximum Level Average annual (12 month)6 CIP budget, for 48 months of budgeted CIP expenses7 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: 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 there are funds in this reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. 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 Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. 6 Each month is calculated based upon 1/12 of the annual budget. 7 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average would be FY 2022 through FY 2025 etc. WATER UTILITY FINANCIAL PLAN March, 2020 42 | 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 Water 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 90 days of O&M and commodity expense Maximum Level 120 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 Water 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 Water 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 Water 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 Water 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 2021, 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. WATER UTILITY FINANCIAL PLAN March, 2020 43 | Page APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES This appendix describes the activities associated with the various operational activities referred to in Section 6B: Operations of this Financial Plan. Administration: Accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as shared communications services, CPAU administrative overhead, and billing system maintenance costs. This category also includes Water Utility debt service and rent paid to the General Fund for the land associated with reservoirs and various other facilities. Customer Service: This category includes the Water Utility’s share of the call center, meter reading, collections, and billing support functions. Billing support encompasses staff time associated with bill investigations and quality control on certain aspects of the billing process. It does not include maintenance of the billing system itself, which is included in Administration. This category also includes CPAU’s key account representatives, who work with large commercial customers who have more complex requirements for their water services. Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small portion of their time is spent assisting with distribution system maintenance. Operations and Maintenance: This category includes the costs of a variety of distribution system maintenance activities, including: • investigating reports of damaged mains or services and performing emergency repairs; • testing and operating valves; • monitoring water quality and reservoir levels; • monitoring the status of the different pressure zones; • flushing water at hydrants and other closed end points of the system; • building and replacing water services for new or redeveloped buildings; and • testing and replacing meters to ensure accurate sales metering. This category also includes a variety of functions the utility shares with other City utilities, including: • the Field Services team (which does field research of various customer service issues); • the Cathodic Protection team (which monitors and maintains the systems that prevent corrosion in metal tanks and reservoirs); and • the General Services team (which manages and maintains equipment, paves and restores streets after gas, water, or sewer main replacements, and provides welding services) Resource Management: This category includes water procurement, contract management, water resource planning, interaction with BAWSCA, the SFPUC, and Valley Water, and tracking of legislation and regulation related to the water industry. ATTACHMENT C March , 2020 1 | Page APPENDIX A: WATER UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Water 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, for the Water Utility Financial Plan delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is 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 Water 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 Water 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 Water 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. ATTACHMENT C March , 2020 2 | 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 and approved by Council resolution. Minimum Level 20% of the maximum CIP Reserve guideline level Maximum Level Average annual (12 month)1 CIP budget, for 48 months of budgeted CIP expenses2 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) 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 there are funds in this reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. 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 Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next 1 Each month is calculated based upon 1/12 of the annual budget. 2 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average would be FY 2022 through FY 2025 etc. ATTACHMENT C March , 2020 3 | Page Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. 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 Water 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 90 days of O&M and commodity expense Maximum Level 120 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 Water 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 Water 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 Water 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 Water 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 ATTACHMENT C March , 2020 4 | Page Financial Planning Period is FY 2016 through FY 2021, 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. City of Palo Alto (ID # 11234) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/21/2020 City of Palo Alto Page 1 Summary Title: Wastewater Collection Utility Financial Projections Title: Staff Recommendation the Finance Committee Recommend the City Council Make no Changes to Wastewater Rates for Fiscal Year (FY) 2021 Beginning July 1, 2020 From: City Manager Lead Department: Utilities Recommendation Staff recommends that the Finance Committee recommend the Council make no changes to Wastewater rates for July 1, 2020. Executive Summary At the April 21, 2020 Finance Committee meeting, staff will present a general overview of the financial projections for the Wastewater Collection Utility. Staff will present the full FY 2021 Wastewater Collection Utility Financial Plan and Cost of Service Study once complete, at a future meeting date. Staff will target a meeting date that is both after the COVID-19 emergency and that allows for full and in person customer attendance and participation in the public meetings and hearing to discuss the proposed rate changes. Attachments: •Attachment A: Presentation on Wastewater Collection Utility Financial Projections APRIL 21, 2020 www.cityofpaloalto.org WASTEWATER COLLECTION UTILITY FINANCIAL PROJECTIONS Attachment A TL ~CITY OF ~PALO ALTO 1 WASTEWATER PROJECTIONS •FY 2021 proposal: •0% overall rate increase •Future projections (following four years) •5% per year increases 2 WASTEWATER UTILITY COST STRUCTURE Palo Alto’s share of the cost to treat sewage at Palo Alto’s Regional Water Quality Control PlantCost to collect sewage within Palo Alto, including: maintaining and replacing sewer infrastructure, customer service, billing, administration, etc. Treatment $12.2 million 57% Collections $9.1 million 43% 3 WASTEWATER UTILITY BASICS •Five partners: Stanford, East Palo Alto, Los Altos Hills, Los 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 4 TREATMENT COST DRIVERS •Regional Water Quality Control Plant needs rehabilitation •Long Range Facilities Plan completed in 2012 •Rehab/replacement of: •Sedimentation tank ($17M) •Outfall pipeline ($9M) •Laboratory/Operations Center ($22M) •Secondary Treatment ($30M) •Advanced Water Purification ($23M) •Headworks Facility ($39M) 5 OPERATIONS/CAPITAL COST DRIVERS •Salary and benefit costs for existing staff •Underground construction cost increases •Capital Spending: •Large Capital Improvement Projects will be conducted every two years 6 WASTEWATER MEDIAN MONTHLY RESIDENTIAL BILL ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 41.37 98.08 81.76 42.91 42.05 38.44 34.30 Palo Alto is 26% below comparison city average 7 WASTEWATER MONTHLY NON-RESIDENTIAL BILL ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward General Commercial 111.58 135.24 107.80 72.10 131.18 66.03 76.16 Restaurant 690.48 1,118.88 1,033.20 666.40 602.00 264.13 541.52 Commercial: Palo Alto is 14% higher than comparison city average Restaurant: Palo Alto is 2% below comparison city average 8 WASTEWATER PROJECTIONS 9 WASTEWATER OPERATIONS RESERVE PROJECTIONS 12 RECOMMENDATION Staff recommends that the Finance Committee recommend that the Council make no changes to Wastewater rates for July 1, 2020