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HomeMy WebLinkAbout2000-06-05 City Council (10)TO: City of Palo Alto City Manager’s Report STUDY SESSION 1 HONORABLE CITY COUNCIL ATTENTION:FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES, DATE:JUNE 5, 2000 CMR: 264:00 SUBJECT:STORM DRAINAGE FEE INCREASE PUBLIC EDUCATION PROGRAM REPORT IN BRIEF In 1994, a Storm Drainage Master Plan (Master Plan) was presented to Council. The Master Plan was under review by the Utilities Advisory Commission when, on November 5, 1996, California voters approved Proposition 218, the Right to Vote on Taxes Act. Proposition 218 limits the authority of local governments to impose taxes and property-related assessments, fees, and charges, without voter approval. Proposition 218 requires that any proposed rate increase be submitted to property owners for approval or rejection. The City Attorney has confirmed that the charge currently levied for the City’s storm drainage program is considered a property-related fee under Proposition 218. In compliance with the procedural provisions of Proposition 218, staffpresented the proposed storm drain rate analysis to the Finance Committee on April 25, 2000. To ensure that property-0wners and the public are well informed regarding the need for a storm drain fee increase, the Finance Committee requested additional information on the City’s public education and outreach effort. This report provides detailed information on the education component of the City’s outreach program. To ensure that voters have an opportunity to make an educated, decision, staff developed an informational brochure; developed an interactive storm drain web site; coordinated a cable television presentation; and scheduled public information meetings. In addition, staff has contacted various community groups and neighborhood associations with offers to schedule presentations for discussion of the proposed storm drain rate increase. CMR:264:00 Page 1 of 6 BACKGROUND In 1965, the City contracted with an engineering consultant to prepare a Storm Drain Master Plan (Master Plan) for future storm drain system improvements. The Master Plan identified a series of projects designed to bring the system to an acceptable level of performance. Although several of the highest priority projects of the Master Plan have been implemented, a majority of the recommended improvements were not completed primarily due to a lack of funding. Inadequacies of the City’s storm drainage system are numerous and well documented. Engineering studies, resident complaints.and maintenance staff observations all support the need for infrastructure improvements to correct storm drainage deficiencies. As a result, during the 1987-88 budget process, Council directed staff to implement a Storm Drainage Enterprise Fund to provide a consistent funding source for needed storm drain maintenance, replacement, and drainage system improvements. The initial storm drain fee was established at $3.25 per month per equivalent residential unit (ERU). One ERU equals 2,500 square feet of impervious area. Single-family homes were charged a fiat rate of one ERU while multi-family and commercial properties were charged ERU’s based on the impervious area of the property. The initial rate schedule approved for the storm drainage utility was intentionally set at a minimal level to support a relatively modest capital improvement program. Following creation of the Storm Drainage Enterprise Fund, staff updated the Storm Drainage Master Plan (CMR: 189:94), and completed a new condition assessment to evaluate the condition of the existing storm drain system. The Revised Master Plan confirmed the need for many of the improvements previously identified in the 1965 Master Plan. In addition, drainage system deficiencies identified through theoretical analysis in the 1965 and 1993 Master Plans are. consistent with observations and experiences of the City’s maintenance staff, and service calls received from residents during the February 1998 winter storm. While the rate was increased to $4.25 per ERU on July 1, 1994, this funding only addressed the highest priority capital projects. On March 3, 1999, staff presented a report to the Finance Committee describing a proposal for financing the next phase of storm drainage improvements. The report discussed the current financial status of the Storm Drainage Fund, the effects of Proposition 218 on the City’s ability to raise property-related fees, and staff’s proposal for storm drainage infrastructure improvements. The report included a detailed discussion of an enhanced operations and maintenance program, and work associated with San Francisquito Creek. Staff also presented a long-term financing plan to fund storm drainage needs through an increase in the storm drainage fee. The Finance Committee gave staff direction on prioritization of the recommended infrastructure improvements to address identified deficiencies. Staff has since completed a compliance analysis of Proposition 218, redefined the scope of needed storm drain improvements, and prepared a proposed rate structure and rate increase (CMR 222:00) to finance storm drain operations and the next phase of the storm drainage capital improvements. CMR:264:00 Page 2 of 6 DISCUSSION Palo Alto is one of the first California Cities statewide to present a property-related fee increase to voters for approval since the passage of Proposition 218. Proposition 218 limits the authority of local governments to impose taxes and property=related assessments, fees or charges; and imposes substantive and procedural rules for the levy of new or increased taxes. The provisions of Proposition 218 require that a proposed tax increase must be submitted to property-owners for approval or rejection, after proper notice and public hearing. A public hearing must be held not less than 45 days after a mailed notice. If written protests are received from a majority of property owners at the hearing, the proposed fee increase cannot be levied. Proposition 218 also requires that assessments be limited to the special benefit conferred on each property owner. As such, the cost allocation of providing storm drain service must be proportional to the benefit and monies raised by the assessment cannot be used for general governmental purposes. Approval is required by mail ballot election in which a majority of voters agree to any new or increased property-related general taxes. To comply with the provisions of Proposition 218 and to ensure the integrity of the September 26, 2000 storm drain fee election, staff undertook development of a comprehensive election management process. Detailed procedures have been developed for the public hearing and mail-ballot election process. In addition, an extensive public outreach and education program has been designed to educate the public about the storm drain program and the need for a fee increase. The public outreach component includes development of an informational brochure, implementation of a storm drain web site, a utility bill insert describing the storm drain fee proposal, a cable television presentation, and a series of scheduled public meetings to allow for voter comments and questions. The informational brochure is designed to address questions from residential and commercial property owners.. It covers a wide range of topics including why the City is proposing to increase the storm drainage fee, what the fee will pay for, and what happens if property owners don’t approve the fee increase. The brochure also includes a brief statement on Proposition 218 and provides the name and telephone number of a designated City employee to answer further questions. The brochure, which will be mailed to approximately 20,000 property owners, will also be available on the Internet with a hyperlink that allows the public to directly contact staff. The City’s web page (www.city.palo-alto.ca.us/stormdrain) will include a site map of project locations and will provide ongoing updates on storm drainage .projects. Staff used preliminary input from the community and Council members on the financial impacts of the proposed storm drain fee increase to respond to questions about the benefit and consequences of the programs to be funded by the fee increase. Answers to the most commonly asked questions will be posted on the website and similar questions will be answered in the brochure CMR:264:00 Page 3 ot" 6 Three neighborhood meetings have been scheduled during July. Evening meetings have been scheduled at the Mitchell Park Community Center and Jordan Middle School. To accommodate voters unable to attend either evening meeting, a Saturday morning meeting will be held at City Hall on July 15. In addition to being published in the brochure, the public meeting schedule will be posted on the City web site and advertised in the local press. The City’s Senior Engineer for storm drain projects will also be interviewed on local public television. The interview will provide information on the history of the City’s storm drainage network and allow for a discussion of the project and the need for repairs. The proposed rate structure and project cost will also be discussed. In compliance with Proposition 218, the City Attorney’s Office has developed comprehensive procedures to govern the mail ballot election process. The procedures define the election process by addressing specific provisions of Proposition 218 and by addressing situations that might occur during the election (issues related to voter eligibility, the .numbers of votes per unit, etc.). Voters can obtain copies of the election process procedure at the Revenue Collections counter in the Civic Center, as well as at community library counters throughout the City. After the protest hearing should voter response indicate the need for further education, additional community meetings will be scheduled. Throughout the process, staff has and will continue to work closely with the project consultants, Harris & Associates and SAE Communications, to provide an extensive public outreach designed to explain the need for a rate increase in an objective and impartial presentation. RESOURCE IMPACT If property owners approve the fee increase, Palo Alto single-family and residential property owners can initially expect to pay an average of an additional $4.75 monthly over the current monthly fee of $4.25 to fund storm drain improvements and maintenance; the exact increase would be based on lot size. With the proposed increase the cost of storm drainage funding (6 percent) is a very small percentage of the property-owners total monthly bill. The 1999-00 Adopted Budget includes funding of $31,000 in the Storm Drain Fund to be used for the storm drainage public outreach and education component of this project. At the current funding level the Storm Drain Fund continues to experience financial fatigue, placing an extreme burden on the general fund through continued subsidies. Presently, the annual cost to the general fund is approximately $500,000 with an anticipated increase to approximately $800,000 annually. Without a resolution to the storm drain funding issue, necessary capital repairs cannot be undertaken. Inaddition, should voters not approve the tax increase the General Fund will have to be redistributed to include major storm drain cost at the expense of other General Fund priority projects. CMR:264:00 Page 4 of 6 POLICY IMPLICATIONS Approval of staffs recommendation is consistent with the Comprehensive Plan: Policy N-24 states that the City should "improve storm drainage performance by constructing new system improvements where necessary and replacing undersized or otherwise inadequate lines with larger lines or parallel lines." Program N-36 further states that the City should "complete improvements to the storm drain system consistent with priorities outlined in the City’s 1993 Storm Drainage Master Plan, provided that an appropriate funding mechanism is identified and approved by the City Council.’, TIMELINE The project timeline has been developed to allow for the timely initiation of this project. Storm drain improvements were initially placed on hold due to the passage of Proposition 218, which places substantive and procedural changes on local governments’ ability to raise revenue. Staff has since completed a Proposition 218 compliance analysis and developed a proposed rate structure that addresses required equity and procedural requirements. Storm drain improvements are long overdue, and without scheduled maintenance and upgrades the system will continues to deteriorate. At the current funding level the Storm Drain Fund continues to experience financial fatigue, placing an extreme burden on the general fund through continued subsidies. Presently, the annual cost to the general fund is $500,000 with an anticipated increase to approximately $800,000 annually. Without a resolution to the storm drain funding issue necessary capital repairs cannot be undertaken. In addition, should voters not approve the tax increase the General Fund will have to be redistributed to include major storm drain cost at the expense of other General Fund priority projects. During the coming year Palo Alto voters will be asked to fund several high priority projects. The proposed storm drain funding methodology is all-inclusive and does not require additional funding from other sources. For these reasons staff feels that it is prudent to bring the proposed storm drain rate increase to voters at this time. June 12 June 16 August 7 September 26 Resolution adopting procedures for the protest hearing and the election, drat~ of public notice regarding fee increase, and Resolution Amending Utility Rules & Regulation 25. Notices of protest hearing are mailed Protest hearing for proposed storm drainage fee increase Storm drainage fee election CMR:264:00 Page 5 of 6 ENVIRONMENTAL REVIEW Consideration of financial options does not require California Environmental Quality Act (CEQA) review. Individual projects will be subject to environmental review as they are further developed. ATTACHMENTS Approval of Rate Structure and Rates to Finance Storm Drain Operations and the Next Phase of Storm Drainage Capital Improvements (CMR 222:00) City of Palo Alto Storm Drainage Fee Brochure PREPARED BY: Joyce White, Senior Financial Analyst DEPARTMENT HEAD: _~~ ._ ~recR~t,, A~~, nistrative Se~ices Assistant City Manager CMR:264:00 Page 6 of 6 TO: ATTENTION: FROM: HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER DEPARTMENT: 2 ADMINISTRATIVE SERVICES PUBLIC WORKS DATE:APRIL 25, 2000 CMR:222:00 SUBJECT:APPROVAL OF RATE STRUCTURE AND RATES TO FINANCE STORM DRAIN OPERATIONS AND. THE NEXT PHASE OF STORM DRAINAGE CAPITAL IMPROVEMENTS REPORT IN BRIEF A Storm Drainage Master Plan (Plan) was presented to Council in 1994. This Plan was under review when California voters approved Proposition 218 in November 1996. Proposition 218 raised a number of questions and procedural issues regarding the ability of the City to raise storm drainage fees. In addition, valuable information gathered during recent storm events, as well as questions from the Finance Committee (Committee) about the scope, cost, and effectiveness of recommended improvements, prompted staffto re-examine the scope of the recommended storm drainage program. The recommended improvements are targeted to address those areas that experience chronic, moderate to severe flooding problems. Capital work is primarily intended to expand the capacity of storm drainage pipes and to add pump stations where gravity drainage systems have proved inadequate. Areas with the greatest needs included the northeastern Palo Alto watershed and the Matadero Pump Station Watershed. Costs for improvements in these areas are estimated at $20 million and $9 million respectively. In addition, an augmented maintenance program, funding for San Francisquito Creek work, and support for the Joint Powers Authority (JPA) effort is recommended. A new.six-tiered rate structure is being proposed for residential properties to Conform with Proposition 218 guidelines better than the existing single fiat-rate Structure. The fee structure for multi-family, commercial, and industrial properties, which is based on the amount of CMR:222:00 Page 1 of 15 impermeablearea on a parcel, will remain in place. In addition, a consultant and staff have developed educational brochures that will explain the proposed rate structure, the reasons for a fee increase, and the approval process that must be followed under Proposition 218. The Storm Drainage Fund is in very poor f’mancial condition. Storm drainage revenues are inadequate to support the existing maintenance program, much less a badly needed capita! and augmented maintenance program. Without an increase in fees, current operations will need to be curtailed or the General Fund will need to provide increasing and substantial subsidies. In FY 1999-00, the City’s General Fund is estimated to subsidize the storm Drain Fund by $459,000. At current rates, this subsidy is expected to grow to $717,000 in FY 2000-01. Continuing these subsidies will severely impact the ability of the General Fund to support new and, over time, current services. To maintain current Storm Drainage Fund activities, initiate an augmented citywide maintenance program, fund a program to address San Francisquito Creek issues, and complete critical infrastructure work over the next 30 years, staff recommends an increase in monthly residential rates from $4.25 to $9.00. It has been six years since the last rate increase. To simply maintain the FY 2000-01 level of service, with no capital work or augmented maintenance, residential rates would need to be adjusted upward to $6.10. RECOMMENDATION Staff recommends that the Finance Committee and the City Council:. Approve staff’s recommendation to pursue an expanded Storm Drainage Program that includes-the following elements: ¯ . an augmented maintenance, repair, and rehabilitation program, estimated at $480,000 annually; c) funding for San Francisquito Creek liaison work, studies, and minor repairs over the next ten years until a regional flood and erosion control solution can be found for the Creek. Annual funding is estimated at $285,000; an annual capital budget funded on a pay-as-you-go basis such that all critical and moderate Storm Drainage Master Plan priorities, totaling $48 million, would be completed in approximately 30 years. Critical priorities are those that would address chronic, moderate to severe street and intersection ponding problems. Moderate priorities are those that would address periodic, moderate street ponding problems. Direct staff to begin the process for increasing the Storm Drainage fee to fund the recommended Program. Staff,s recommendation would require approval of a fee CMR:222:00.Page 2 of 15 increase from the current monthly residential rate of $4.25 per Equivalent Residential Unit (ERU) to $9.00 in years 2001 and 2002, $10 in year 2003, and an increase of no more than the rate of inflati on thereafter. The process for increasing this fee includes a noticed protest hearing and a property owner election. BACKGROUND Over the past five years, staff has met with the Finance Committee (Committee) to answer questions on recommended Storm Drainage Programimprovements, to present a summary of community input on these recommendations, and to outline a scope of work that would meet the City’s most critical storm drain needs. During this time, Proposition 218 was passed by the voters of California. This constitutional amendment has added new complexities to local government’s ability to impose or increase property-related fees, and has significantly delayed staff’s request for an increase in the Storm Drainage fee. In 1994, staff presented to the Committee a summary of storm drain infrastructure improvements recommended in the Storm Drain Master Plan and Storm Drain Condition Assessment studies. Recommended work consisted of a $60 million (in 1994 dollars), 30- year program to replace or repair damaged drainage system components and to increase system capacity by constructing new storm drain pipelines. Staff also presented a number of funding options, including debt financing, pay-as-you-go, and a combination of the two methods. After reviewing the recommendations, the Committee directed staff to: 1.Divide the proposed storm drain projects into three categories, prioritized as follows: system repair and ongoing programs; construction of new or improved drainage facilities in areas which are substandard compared with the rest of the City; and remaining projects to upgrade drainage capacity. Proceed with Category A and B projects using a combination of Storm Drainage fee revenue and bonds. Hold the Category projects in Committee while staff conducted an extensive outreach effort to determine public interest in pursuing the storm drain augmentation program. In Fall 1995, a consultant assisted staff in conducting a public outreach campaign to gauge the level of public interest in storm drain improvements. An informational brochure outlining improvements and their costs was distributed to the community. Staffthen hosted a. series of ten community meetings. At each meeting, staff.offered a detailed presentation of the history and ratiortale for the proposed storm drain improvement program and a CMR:222:00 Page 3 of 15 proposed financing strategy. During the meetings, there was considerable opportunity for questions and comments from residents and businesses. Although the neighborhood meetings produced lively discussion, there was no consensus on the merits of funding Category C projects. Residents of areas where ponding of storm water runoff is a chronic problem due to drainage deficiencies expressed the strongest support for improvements. Concerns were expressed by other residents about the fairness of a citywide fee paying for area-specificimprovements; the wisdom of incurring substantial long-term debt to finance the improvements; and the financial impact on ratepayers. Progress toward implementing storm drainage improvements was interrupted by the passage of Proposition 218 in November 1996. The passage of the proposition resulted in a comprehensive constitutional amendment that affected property-related fees, assessments, and taxes. After an analysis of the law’s content, the City Attorney’s Office determined that the City’s Storm Drainage fee is a property-related fee regulated by Proposition 2i8. The proposition outlines specific, detailed conditions and procedures that must be followed in order to impose or increase such fees. Achieving compliance with these requirements has delayed staff’s progress towards development of a new fee proposal for Council consideration. In March 1999, staff returned to the Committee with more information on the condition of the storm drainage system, the proposed improvements, and the estimated funding required for those improvements (CMR: 147:99). Staff reported that as a result of the wet winters of 1995, 1997 and 1998, it had numerous opportunities to measure the adequacy of the drainage system during severe storm conditions. Valuable information gathered during storm events through on-site observations by City staff, tracking and analysis of residents’ reports of ponding conditions, and pump station operational data led to several important conclusions: Actual storm events confirmed the Master Plan’sfinding that components of the storm drain system lack adequate drainage capacity. Drainage problems occurred both in areas with minimal drainage facilities and in areas with undersized facilities. Many storms smaller than the 10-year storm event (recommended as the design standard for improvements) resulted in ponding on streets and intersections and caused minor structure flooding in several parts of the City. There is a correlation between areas of the City experiencing the most frequent drainage problems and areas assigned the highest priority for drainage improvements in the Master Plan. These areas, have relatively flat, low-lying terrain that. drains slowly and is below the high water levels in the creeks during heavy storms. Streets draining to creeks by gravity, without the advantage of a pump station, are particularly vulnerable to ponding. CMR:222:00 Page 4 of 15 Storm events prompted staff to re-examine the appropriateness of some of the specific recommendations in the Master Plan. In particular, during preparation of the. Master Plan, staff purposely attempted to avoid the need for additional storm water pump stations because of their relatively high cost and maintenance requirement.s. Storm observation data, however, showed that the worst drainage problems in the City occur on gravity systems that are unable to drain when the creeks reach high levels. Construction of new pump stations is expected to be a superior alternative to the installation of larger pipelines -in these areas. Several areas of the City with the most severe drainage deficiencies were not completely addressed in the Master Plan. These areas have inadequate or nonexistent local drainage facilities. These drainage deficiencies were evident during the February 1998 storm where many areas outside the San Francisquito Creek floodplain experienced flooding caused by storm drainage backups. Staff concluded that the allowance factored into the Master Plan cost estimates was not sufficient to correct local drainage deficiencies and consequently developed a supplemental estimate to cover those costs. Additional modifications to existing pump stations are required to optimize their performance. As a result of prior projects to upgrade pump stations and their monitoring and remote telemetry systems, a-wealth of information has been gathered on their performance during winter storms over the past several years. Staff has identified further modifications to improve pump station performance, safety, reliability, and efficiency. A supplemental estimate to cover the costs of station upgrades has been developed. Based on these conclusions, staff recommended a three-pronged approach to augment the existing Storm Drainage Program. Each of these Program elements is discussed briefly below (for more information see CMR: 147:99): Operations and Maintenance Augmentation ($480,000) When the Storm Drainage Fund was created in 1989, maintenance staffing was set at a minimum level to keep initial user fees low and to allow an evaluation of actual, staffing needs. With the exception of a temporary staffing decrease due to budget constraints and the addition of an Instrumentation Electrician in 1998, staffing levels have held fairly constant since 1989. With the critical need for operational improvements, staff recommended a $480,000 annual increase to the storm drainage budget for: ¯One additional field crew member ($60,000). ¯One administrative person to manage data for Storm Drainage billing and field maintenance activities ($60,000). This position would update billing records to CMR:222:00 Page 5 of 15 reflect changes in impervious area, make billing adjustments, respond to customer billing inquiries, and collect, input, and manage storm drain maintenance datal $60,000 annually for future condition assessments of the storm drainage system to be conducted approximately every ten years. This assessment includes inspection and evaluation of individual manholes, catch.basins, and pipelines as well as a listing of needed repairs and replacements. $100,000 annually to replace or upgrade .water pump station equipment as needed. The City has six pump stations and two additional stations are recommended for construction. $200,000 for an annual curb and gutter repair program. Funding has been reduced in recent years as the Fund’s financial condition deteriorated. This would restore funding to its previous level. San Francisquito Creek Liaison Work and Local Improvements ($285,000) San Francisquito Creek is the largest remaining flood threat in Palo Alto. The February 1998 flood displayed the magnitude of damage this creek can cause. While the Santa Clara Valley Water District and the San Mateo County Flood Control District have primary flood control responsibility for this creek, a flood control project will require a cooperative effort. A Joint Powers Authority.(JPA) to oversee such a project has been formed. Although the exact nature of long-term creek flood control improvements are unknown at this time, staff estimates the following needs over the next ten-years until a more permanent regional flood control solution is reached: ¯$85,000 annually for ten years for a dedicated creek liaison staff person. $200,000 annually for ten years for activities such as engineering studies, environmental assessment, right-of-way acquisition, public outreach, erosion control work, or local improvements related to the regional flood control project. 3.Capital Improvements ($48 million) With five years of winter season experience since the Master Plan’s publication, staff has accumulated substantial information on the relationship .between the storm drainage system and local flooding. Observations and data have caused staff to revise prior recommendations and propose $48 million in capital improvements to be funded and constructed over 30 years, as described below: CMR:222:00 Page 6 of 15 Priority Group 1:CRITICAL PRIORITY, $24 million: a)Complete rehabilitation of existing infrastructure that deteriorated, as identified in the 1993 Condition Assessment. has b)Fund minimum set of infrastructure enhancements for chronic, ¯ .moderate to.severe streetpondingproblems. Priority Group 2: MODERATE PRIORITY, $24 million: Fund a set of infrastructure enhancements to address periodic, moderate street ponding problems. Funding these priorities would require an increase of 0.5 to 1.0 engineering staff person for a period of 30 years to handle all critical and moderate priority capital work.. During the Committee’s review of staff’s recommendations, questions were raised regarding the extent and severity of existing deficiencies throughout the City and the expected effectiveness of the proposed program. To address these concerns, staff returned with a .report (CMR:227:99) in May 1999 that summarized the most severe deficiencies and provided information that corroborated the need for improvements. This information was presented so the Committee could better assess proposed program benefits to the community and fee levels necessary for recommended improvements. Citing .specific areas of the City with the most severe problems, staff detailed and prioritized specific improvements that generally fell into two major categories: construction of replacement, parallel and diversion pipelines to increase the capgcity of the storm drain network; and pump station improvements, including .capacity upgrades to existing pump stations, construction of new pump stations, and the connection of existing storm drains to pump stations to improve the storm drain system performance. While a comprehensive description of the improvements can be found in CMR:227:99, several examples are informative. The northeastern Palo Alto watershed, where some of the most severe and chronic flooding problems occur, has Storm drains that are undersized and subject to backup when there is a high water level in San Francisquito Creek. Installation of new pump stations and diversion pipelines are required to ameliorate flooding conditions in this neighborhood. The estimated costs for work in this watershed are $20 million. A second Critical area is the Matadero Creek watershed. Much of the land in this area, particularly the eastern portion near Highway 101, is lower than the creek water level during storms. Problems include undersized pipes, the inadequate capacity of an existing pump station, CMR:222:00 Page 7 of 15 and the need to connect several new areas to the pump station. Staff has estimated the costs to upgrade the pump station, add new pipelines and replace old, undersized pipes at approximately $9 million. After presenting this additional information, the Committee gave staff direction to prepare a financing plan and to determine necessary steps for voter approval of a rate increase. With the rate increase requirements introduced by Proposition 218, staff proceeded to hire a consultant with the necessary expertise.in interpreting and meeting th0se_requirements and in developing appropriate educational brochures for the community (CMRs:317:99 and 409:99). DISCUSSION The last increase in the Storm Drainage fee was adopted by Council in FY 1994-1995, when the monthly fee was raised to $4.25 per Equivalent Residential Unit (ERU). The rate was increased at that time in order to pay for capital improvements financed through the sale of bonds. The majority.of work covered by the 1995 bond issuance has been completed. The work included storm drain pump station improvements, storm drain system replacement/rehabilitation, curb and gutter replacement, and the Barron Park storm, drain improvements. While this capital work has resulted in substantial improvements to the drainage system, a significant amount of additional work is needed. Revenues under the current fee structure are inadequate to support current operations and any additional capital improvements. During the past year, staff from the Administrative Services and Public Works Departments and the City Manager’s, City Attorney’s and City Clerk’s offices have been working with a consultant (Harris and Associates) to develop a storm drain rate structure, rate recommendation, and voting procedures that conform to the requirements of Proposition 218. A basic knowledge of these requirements is critical to understanding the proposed rate methodology and the election process. Proposition 218 Requirements Given the legal determination that Storm Drainage fees are property-related fees, the following key elements of Proposition 218 regulate proposed fee increases: ¯Revenues derived from the fee shall not exceed the funds required to provide the service. ¯Fees must reflect the proportional cost of delivering storm drain service to a property and cannot be used for general governmental purposes. A written notice must be mailed to each property owner of record showing the amount of the proposed fee, method of fee calculation, rationale for the fee, and a time and place for a public hearing. CMR:222:00 Page 8 of 15 A public hearing must be held not less than 45 days after the notice mailing, and all protests at the hearing shall be considered. If written protests are received from a majority of property owners at the hearing, the proposed fee increase cannot be levied. ¯A mail ballot election by property owners must be conducted not less than 45 days after the public hearing in which a majority vote is required to approve the fee increase. These requirements place a.significant burden on the.. City .to develop an appropriate rate structure, identify property owners affected by the proposed fee increase, and conduct a mail ballot election. Current and Proposed Storm Drainage Fee Rate Structure Under the current Storm Drainage fee rate structure, all developed parcels in the City are billed $4.25 per Equivalent Residential Unit.(ERU) per month. An ERU consists of 2,500 square feet of impermeable area. All single-family and duplex residential units, regardless of their parcel size, are billed 1.0 ERU. Multi-family residential, commercial, and industrial properties are billed according to the measured amount of impermeable area on the parcel. Staff and the consultant believe that the current rate structure for non-single-family residential properties is compliant with Proposition 218. The fiat rate structure for all single-family and, duplex residential properties, however, required further analysis based on Proposition 218 guidelines. Since the Proposition requires that a fee "not exceed the proportional cost of the service attributable to the parcel," a rate structure more closely aligned with the amount of impervious area on a parcel appeared more appropriate. A study based on a five percent sampling of residential properties was conducted to test the accuracy of the 1.0 ERU per parcel assumption. The consultant’s study identified impervious areas ranging from 1,000 to 5,000 square feet per parcel. The study concluded that, based on the wide diversity of impervious areas on the sample parcels, a tiered rate structure based on parcel size would be more equitable. Analysis of the sample data showed a relationship between the size of a parcel and the amount of impervious area on the property. Based on this information, parcels have been grouped into six categories, each of which would be charged a different fee. The range of 9arcel sizes and proposed billing amounts (ERU) for each category are as follows: CMR:222:00 Page 9 of 15 Parcel Size (sq. ft.) Proposed Current ERU .ERU 1,000-3,999 0.6 1.0 4,000-5,999 0.8 1.0 6,000-10,999 1.0 1.0 11,000,12,999 1.2 1.0 13,000-17,999 1.4 1.0 18,000÷ 1.6 1.0 This tiered rate system will more closely approximate the actual impervious areas for the residential parcels and satisfy the "proportional to use" requirements set forth in Proposition 218. For a comparison of the current residential fees with the proposed fees see Attachment A. Financial Condition and Requirements of the Storm Drainage Fund Without a rate increase since FY 1994-95, the Storm Drainage Fund currently is in poor financial condition due to cost of living increases for salary expenses, debt service payments, and other expenses. Whereas staff originally planned to receive Council approval for rate increases every two to three years to meet ongoing revenue needs, the passage of Proposition 218 has postponed any rate increases subsequent to FY 1994-95. For FY 1999-00, Storm Drainage Fund revenues and interest income will be insufficient to cover operating expenses, resulting in the need for a $459,000 loan from the General Fund. Without a rate increase in FY 2000-01, the annual deficit is anticipated to grow to $717,000 out of a proposed budget of $2.8 million. These budget deficits have major consequences for the Storm Drainage Fund and for the City’s General Fund. If rates are not increased in FY 2000-01, the recommended capital improvement program would need to be deferred and the proposed operations and maintenance program enhancements cannot be implemented. Moreover, current maintenance levels will have to be reduced to match Storm Drainage Fund revenue. An unappealing alternative would be to subsidize the Storm Drainage Fund with General Fund revenues on an ongoing basis. Such a subsidy may well require a reduction in current General Fund services. At a minimum, General Fund resources that would otherwise be used for existing and new programs such as the General Fund infrastructure program, shuttle service, traffic calming, development of a park at the former Palo Alto Medical Foundation site, and other new in~astructure projects will be severely impacted. A rate increase is necessary to forestall decreased storm drain service or excessive General Fund’ subsidies. Staff recommends an expanded Storm Drainage Program that meets currently identified needs. In order to fund this Program, the Storm Drainage fee would need to be increased from the CMR:222:00 Page 10 of 15 current monthly residential rate of $4.25 per Equivalent Residential Unit (ERU) to $9.00 in years 2000-01 and 2001-02, $10 in year 2002-03, and anincrease of no more than the rate of inflation thereafter. Under this rate structure, Priority 1 and 2 capital improvement projects totaling $48 million (outlined in the Background section) can be completed over the next 30 years. Annual funding for these projects will be ramped up over time as revenue increases, moving the City closer toward the goal of coping with 10-year storm events. In addition, the fee increase .allows for a $.48.million .citywide augmented maintenance program and a $.29 million program to address San Francisquito Creek (also outlined in the Background section). While the majority of these augmented operations and maintenance programs will be implemented immediately, the annual banking of funds for pump station equipment replacement and for future condition assessments would be deferred for the first two years. In staff’s original plan, funds were to be set aside each year to eventually replace expensive pump equipment and to conduct a systems condition assessment study. To moderate the amount of the required fee increase, staff recommends that the collection of these funds be delayed for several years. Most importantly, the fee increase will allow the City to maintain its current level of storm drain services. While staff is cognizant that raising the monthly fee from $4.25 to $9.00 per ERU is a significant increase, it is important to place this proposal in perspective. If an increase is approved in FY 2000-01, it will have been six years since the last fee change. Had the local Consumer Price Index been applied to the fee since FY 1994-95, the fee would have risen to $5.00 beginning in F¥ 2000-01. The proposed FY 2000-01 budget, which is basically a status quo budget that contains no augmented maintenance and no capital improvement funding, requires a rate increase to $6.10 to break even: Thus, a significant portion of the proposed rate increase is needed solely to keep current maintenance efforts in place. The additional increment Of $2.90 per month, resulting in the recommended $9.00 fee, is for the augmented capital and maintenance program outlined above. Staff has researched storm drainage fees in other communities to serve as a basis of comparison for the proposed rate increase. In a nationwide survey of storm drainage fees conducted by a major consulting finn in 1998, monthly residential fees ranged from $0.24 to $11.31. Inflating these fees to the year 2000-01 would result in a range of $.26 to $12.36. The scope of services funded by these monthly storm drainage fees varied widely from jurisdiction to jurisdiction. Palo Alto’s fee would be considered a relatively broad-based fee, covering capital improvements, maintenance, and water quality protection costs. On this basis, the recommended fee, while falling toward the high end of the spectrum, does not appear unreasonable considering the broad scope of the City’s enlaanced storm drain program. In order to fund the augmented maintenance and San Francisquito Creek programs and to sustain the Storm Drainage Program in future years, staff recommends that the monthly fee be raised to $10.00 per ERU in FY 2002-03, with annual increases of no more than the rate of CMR:222:00 Page llof 15 inflation thereafter. Proposition 218 permits inclusion of a cost index and/or schedule of year- to-year fee increases as long as the proposed fee schedule is described in the official notice and ballot submitted to property owners for approval. This allows the City and ratepayers to avoid subsequent rate approval processes and incorporates a reasonable rate of increase into the fee structure. It should be noted that the City would not be required to increase the fee to the maximum approved adjusted amount each year. This provides the City with flexibility to match revenues to expected expenditures and to moderate Fund reserve lev.els in case they become too high. The recommended.inflation index for calculating fee increases is the San Francisco Price Index for Urban Wage Earners and Clerical Staff. Attachment B shows the projected fees for future years based on the recommended program. Staff’s recommended financing plan does not contain debt financing for future capital improvements. The City recently refinanced the Storm Drainage Fund’s 1990 bonds (saving approximately $100,000 per year). Combined with the outstanding 1995 bonds, the Fund is committed to annual debt service payments of $.95 million per year through 2024. Given this existing commitment and considering the additional interest and issuance costs a bond financing requires, staff does not recommend assuming additional debt for future capital improvements and has prepared a pay-as-you-go financing plan. Staff believes that the level of community awareness of the need for storm drainage improvements has heightened as a result of recent wet winters and especially since the February 1998 flood. This change in awareness provides an opportunity and a challenge for the City. Heightened support for drainage improvements improves the chances for voter approval of a Storm Drainage fee increase. On the other hand, staff must be. sensitive to the public’s expectations by accurately describing the scope of the proposed storm drain improvements. Proposed storm drain improvements are not sufficient, to prevent the type of flooding that occurred in February 1998. This event can only be averted through a comprehensive, regional. flood control project for San Francisquito Creek that goes beyond the scope of the proposed drainage improvements outlined in this report.. Nevertheless, the proposed fee increase will result in an improved storm drainage system that will address the most severe and chronic problem areas. Noticing and Election Process As a consequence of Proposition 218, the fee approval process is significantly more complicated than in the past. As noted, the City must distribute notices to all property owners notifying them of the proposed fee increase, the methodology used to determine the fee, and the specific amount they will be charged if the fee increase is approved. It is important to note that the Proposition specifies that only property owners, who may or may not be ratepayers, can participate in the fee approval process. Owners of undeveloped parcels, who are not billed for storm drainage, will not participate in the process. Formal procedures that will govern the public hearing and mail ballot process are being prepared by the City Attorney’s Office and will CMR:222:00 Page 12 of 15 be overseen by the City Clerk. The final procedures governing the noticing and election will be presented to Council on May 22. To inform property owners about the specific capital improvements and other Storm Drain Program enhancements the proposed fee increase will cover, an outreach consultant and staff are preparing educational brochures to be distributed with the official notices and will conduct a series of community meetings. Information on the proposed fee increase and improvements will also be.mailed in a utility bill prioro.to ballot mailing. These public, outreach materials are for informational purposes only and will not advocate for the proposed fee. The projected schedule for the noticing and balloting process can be found under "Timeline" below. ALTERNATIVES TO STAFF RECOMMENDATION To avoid a more substantial rate increase while implementing the most critical parts of the augmented maintenance and capital improvement program described .above, .staff has recommended an initial fee increase to the $9.00 level. Alternatives for the Committee to consider are: 1) do not implement an augmented Storm Drainage Program as outlined above and maintain the current, level.of service with no capital improvements with a $6.10fee; or 2) accelerate implementation of capital improvements by raising the fee to $10.00. Maintain Current Operations and Do Not Augment the Storm Drainage Program: InCrease Monthly Fee to $6.10 per ERU As discussed above, to maintain current storm drainage operations in FY 2000-01, a rate increase to $6.10 would be needed. This fee, along with a cost of living increase each year, should be sufficient to continue current service levels and allow the Storm Drainage Fund to remain fiscally sound. The advantage of this alternative is that it would have less impact on ratepayers and have a greater likelihood of being approved by property owners. This alternative is not recommended because it would result in no Priority 1 or Priority 2 capital improvements to the Storm Drainage system and would not provide any funding for augmented maintenance or programs related to San Francisquito Creekl There is considerable evidence that serious ponding problems occur chronically throughout many parts of the City. Staff strongly believes that upgrading the storm drainage system to accommodate a 10-year storm event is a reasonable and valuable goal for the community. Accelerate Capital Improvements: Increase Monthly Fee to $10.00 per ERU This alternative would enable the City to accelerate the construction of capital improvements to correct storm drainage deficiencies. For each $1 ~00 increase in the fee, revenues are increased by roughly $.5 million. Staff’s recommendation provides for a ramping up of capital improvements over time, so that Priority 1 and 2 projects will be completed in 30 years. By raising the fee to $10.00 in FY 2000-01, the proposed capital improvements could be completed in approximately 27 years. CMR:222:00 Page 13 of 15 This alternative fee level is expected to be less palatable to voters than staff’s recommendation. While staff would welcome an accelerated capital program, it is necessary to recognize community sensitivity tothis more substantial increase. Staff does not recommend this alternative. RESOURCE IMPACT Failure to obtain approval of the proposed $9.00 fee will defer all future storm drain capital improvement projects and quickly . erode current.levels of storm drainage system services. ,Without this increase, the City must either allow storm drainage service to decline or provide substantial subsidies from the General Fund. As stated, without a fee increase, the General Fund subsidy for FY 2000-01 is projected to equal $717,000 and will increase in future years. The proposed $9.00 fee would raise an additional $2.4 million in revenue annually. POLICY IMPLICATIONS Approval of staffs recommendations is consistent with the Comprehensive Plan: Policy N-24 states that the City should "improve storm drainage performance by constructing new system improvements where necessary and replacing undersized or otherwise inadequate lines with larger lines or parallel lines." Program N-36 further states that the City should "complete improvements to the storm drainage system consistent with the priorities outlined in the City’s 1993 Storm Drainage Master Plan, provided that an appropriate funding mechanism is identified and approved by the City Council." TIMELINE Following Committee approval of an augmented Storm Drainage Program and related fmancing plan, staff can begin the fee approval process. Assuming a proposed rate increase is recommended by the Committee and the Council, the following milestones and dates are projected: May .22 Request for Council approval of Resolution Adopting Procedures for Protest Hearing and Election, Ordinance Allowing for Mail Ballot Elections, Draft of Public Notice Regarding Fee Increase, and Resolution Amending Utility Rule and Regulation No. 25, Council approves Finance Committee recommendation for Storm Drainage Program and rates June 2 Notices for Protest hearing are mailed July 24 Protest hearing for proposed Storm Drainage fee increase September 12 Storm Drainage fee election CMR:222:00 Page 14 of 15 ENVIRONMENTAL REVIEW Consideration of financial options does not require California Environmental Quality Act (CEQA) review. Individual projects will be subject to environmental review as they are further developed. ATTACHMENTS Attachment A: Storm Drainage Fee Rates Analysis Report PREPARED BY:Joe Saccio, Manager, Investments and Debt Joe Teresi, Senior Engineer DEPARTMENT HEAD APPROVAL: CARL Director Admin:~ Services GLENN S. ROBERTS Director of Public- Works CITY MANAGER APPROVAL: EMIL’~THA~SON Assistant City Manager cc: Utilities Advisory Commission CMR:222:00 ¯ Page 15 of 15 ATTACHMENT A COMPARISON OF RESIDENTIAL STORM DRAIN RATES Parcel Size (sq. ft.) 1,000 - 3,999 4,000 - 5,999 6,000- 10,999 11,000 - 12;999 13,000- 17,999 18,000 + Current ERU* 1.0 1.0 1.0 1.0 1.0 t .0 Current Fee (S/month) S 4.25 $ 4.25 $ 4.25 $ 4.25 $ 4.25 $ 4.25 Proposed ERU* 0.6 0.8 1.0 1.2 1.4 1.6 ERU = Equivalent Residential Units Based on proposed initial monthly rate of $9.00 per ERU Proposed Fee .(S/month) $ 5.40 $ 7.20 S 9.00 $10.80 $12.60 $14.40