Departments of Finance and Utilities
Reference: Water Treatment Plant Ordinances and Resolutions
To: Mayor Gregory Mills and Members of City Council
Through: Michael Martinez, City Manager
Prepared By: Catrina Asher, Finance Director
Marc Johns, Interim Utilities Director
Date Prepared: June 14, 2022
PURPOSE
To provide City Council with recommendations on actions necessary for the construction of an expanded Water Treatment Plant. This staff report includes 1) a water rate ordinance; 2) two contract resolutions; and 3) one resolution approving reimbursement of costs from bond proceeds.
STRATEGIC FOCUS AREAS
Financially Responsible
Supportive, Sustainable Infrastructure
WATER TREATMENT PLANT BACKGROUND
On January 25, 2022, Staff presented City Council with an update on the water needs of the City and possible solutions to address summer peak demand as well as continued growth in the City. At this meeting, Staff presented options for a Water Treatment Plant project which included two proposals with similar costs but different impacts on capacity. Through that discussion, it was determined that Staff would move forward with the Water Treatment Plant option summarized below:
Original Capacity 10 MGD
Capacity Increase: 10 MGD
New Capacity 20 MGD
Growth Outlook: 25 Years
Cost: $155 million
Processing Update: Discontinuation of RO process which removes brine discharge
PROJECT MILESTONES
The project is moving forward with the following major milestones ahead.
Groundbreaking: July 26, 2022
Design Completion: September 2023
Project Completion: July 2025
ITEM #1 - WATER RATE ORDINANCE
The proposed ordinance includes a July 1, 2022 rate reset, a January 2023 water treatment plant fee, and proposed enhancements to the water assistance program. Each of these items are discussed here separately.
WATER RATE RESET
BACKGROUND
In 2018 and 2019, City Council and Staff identified concerns regarding the rates charged to customers and the growing reserves in the Water Fund. It was determined that the growing reserves were due to projects being planned but not completed in a timely manner. With the assistance of a water rate consultant, the rates were reviewed and options were considered, including leaving rates stable or reducing rates temporarily. The decision made by City Council in 2019 was to reduce rates by 8% in order to utilize the excess operating reserves that had accumulated in the fund. This rate decrease was implemented in 2020 and applied to all customer categories. Rates remained consistent in 2021 and 2022.
In 2022, the rate model and financial results of the fund were updated and reviewed by Staff with the support of the water rate consultant. The updated model with financial results from 2020 and 2021 revealed that the reserves had been spent down as planned but are now lower than anticipated or recommended. It is a best practice to maintain an operating reserve equal to six months of the annual operating budget of the fund. This practice allows for the fund to absorb variances in revenues as well as unanticipated repairs and maintenance. As of December 2021, the operating reserve in the fund is approximately one month of the annual operating budget, well below the recommended levels.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
Enterprise funds, like the City’s Water Fund, operating like a business funded by revenues from customers. The City is limited in the ways it can financially support an enterprise fund and tax revenues or transfers from the General Fund are significantly limited by TABOR. The rates charged for usage of water are the primary source of funding for operational costs, including repairs and maintenance of the existing facility and infrastructure. The rates should be reviewed and adjusted annually based on actual operating results as well as updates to the projected costs of maintaining the system.
STAFF RECOMMENDATION
The rate reduction approved in 2019 was intended to be temporary and has accomplished the goal of utilizing reserves. At this time, in order to continue funding the operations of the Water Fund at an appropriate level, staff recommends that the rate reduction be reinstated with an adjustment for inflation realized in the ensuing years.
Utilizing the CPI Data for the Denver-Aurora-Lakewood area published by the Colorado Department of Local Affairs, the CPI adjusted rate reset recommended is 9.11% (see calculation below). Based on average single family usage, this increase equates to approximately $2.48/month in the winter and $7.00/month in the summer.
Based on the rapid reduction of the Water Fund’s operating reserve and the low level of reserve held as of December 2021, it is recommended that this rate reset be implemented in July 2022. A proposed July 2022 rate sheet is included with this report.
WATER TREATMENT PLANT FEE
BACKGROUND
The Water Treatment Plant is expected to cost $155M with an anticipated construction timeline of 3 ½ years. The City intends to fund this through a combination of borrowing and grants.
Currently, the City has approximately $10.5M in ARPA funds that are eligible for use on a project of this nature. Staff are also pursuing other grant options as they come available, however grants for this type of project are generally limited.
Due to the timeline of construction and to maintain flexibility to adjust to future grants that may be received, Staff has recommended financing this project through two rounds of borrowings. The first would occur in late 2022 with an amount of $60M. The second borrowing will occur in early-mid 2024 with an amount estimated to be $80M-$90M, depending on grants received and other financial updates between now and the issuance.
When a municipal enterprise fund, like the Water Fund, issues debt for a project, that debt is secured by the future revenues of the fund. The borrowing process includes a ratings assessment by a rating agency (e.g. Standards & Poors) where the financial projections of the fund are reviewed to ensure that the fund can be expected to fully repay its debts and maintain sufficient reserves.
STAFF RECOMMENDATION
The current revenues of the fund, even with the rate reset being proposed, are not sufficient to repay the debt service that will be required to fund this project. Therefore, Staff is recommending a Water Treatment Plant Fee to fund the project and associated debt service.
The proposed Water Treatment Plant Fee would be a flat charge per month based on average usage in each customer category. The base charge proposed is $6/month for a single family, residential account. This amount increases based on average category usage. The intent for a fee of this nature is that it remains in place until the Water Treatment Plant is fully funded. The rate would be subject to annual review and approval, consistent with other utility rates.
While groundbreaking is scheduled for July 2022, Staff is proposing that this rate be implemented in January 2023. This timing will support the future payment needs of the fund and will avoid having both a rate reset and Water Treatment Plant Fee assessed in the same timeframe. A proposed January 2023 rate sheet is included with this report.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
Funding a project of this magnitude requires that fees and rates be set at levels that will support the financial obligations of the project. By approving a Water Treatment Plant Fee in 2022 for implementation in 2023, this shows rating agencies and potential investors that the City has strong support to properly fund the project and the related debt service. Taking action at this time will support a strong credit rating for the Fund and will allow Staff time to communicate with residents regarding the fee well ahead of it being implemented.
ENHANCED CUSTOMER SUPPORT
BACKGROUND
The City currently offers customers financial support through the Water Assistance Program, which is defined in and governed by the City’s Municipal Code. This program is managed internally allowing for a quick turnaround time for applicants (usually less than one week). As it is currently written, the program allows customers to apply for assistance once per year. The program is intended to support customers that are low income, and to qualify for assistance, customer must show that their income is below 185% of the Federal Poverty Line or that they are already approved for assistance through programs including Medicaid, Food Stamps, etc. If approved, customers receive a one-time credit of $300 on their utility bill. If the credit results in a credit balance, that credit balance rolls forward to the next month’s bill. The program is currently funded at $50K and is paid from the Water Fund.
The proposed rate reset and Water Treatment Plant Fee, when combined and applied to average water usage for a single family home, averages to roughly $10/month year round. This amount is estimated and could be lower in the winter and higher in the summer, depending on the circumstances for an individual home and that home’s watering and conservation practices.
STAFF RECOMMENDATION
City Staff recognizes that the approximately $10/month in increased utility fees could be challenging for our most vulnerable customers. To help support those customers, Staff proposes the following changes to the existing program:
• Increase the amount available per customer from $300 to $500 annually
• Allow customers to apply as many times as needed until their full $500 is utilized
• Remove the ability for the assistance to create a credit balance on an account
• Increase total funding for the program from $50K to $100K
• Consider options for supporting residents that are not customers (e.g. pay for water through rental charges or HOAs)
The program and funding for it runs annually has already supported more than 60 customers in 2022. Because the program for 2022 is already well underway, Staff recommends making these programmatic changes effective January 2023.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
This program is offered by the City to support low-income, vulnerable households. Enhancing the program as proposed would increase funding available to qualified households at a level that would offset the average $10/month increase anticipated.
The enhanced funding would increase spending in the Water Fund by $50K, annually. This increase would not impact the rate analysis or increases that have been proposed.
FINANCIAL IMPACT OF THE WATER RATE ORDINANCE
WATER FUND IMPACT
The recommendations made would address rates in 2022 and 2023. The amounts proposed are designed to support the fund being financially stable and strong and able to support the proposed project.
It is anticipated that a 5% rate increase will be proposed in 2024 and that nominal rate increases will be proposed thereafter (2.5%-3.5%).
Staff strongly recommends that rates be reviewed annually and consider actual financial results and changes to projected operational costs and project needs. As CPI grows, it should be anticipated that rates will increase nominally each year. This approach keeps the increases steady and manageable for staff and avoids “rate shock” for customers.
CUSTOMER IMPACT
Staff assessed customer impact based on average winter usage of 4,000 gallons per month and summer usage of 14,500 gallons per month.
The rate reset proposed for July 2022 would be estimated to increase average monthly charges by $2.48-$7.00 per month. Summer usage is highly variable and depends heavily on the practices of the individual customer and household.
The Water Treatment Plant Fee proposed for January 2023 would add a flat $6/month fee to all single family residential accounts (3/4 inch meters).
On average, summer usage levels account for four months of the year and winter usage accounts for eight months. Using this assumption, through the end of 2023, Staff estimates an average annual impact of $120/customer. For qualified customers, this would be offset by the proposed $200 annual increase to support available through the Water Assistance Program.
ITEM #2 - CONTACT RESOLUTIONS
DESIGN CONTRACT AMENDMENT - Brown & Caldwell, Inc.
In 2019, the city conducted a formal solicitation process to identify a contractor to design a water treatment plant expansion. The solicitation resulted in two responses and Brown & Caldwell, Inc. was selected to complete the design. The original contract requested that Brown & Caldwell design a plant expansion, adding 4 MGD of capacity to the current plant.
In January 2022, Council was presented with options for moving ahead with the current 4 MGD expansion or considering a project that would construct a new plant with an additional 10 MGD of added capacity. Based on the costs presented and the project outlooks, Council chose to move forward with the option of constructing a new water treatment plant that added 10 MGD to the current capacity. The estimated cost of this project was around $150 million at that time. The current cost estimate is closer to $155 million, which includes additional design costs resulting from the change in scope.
The proposed resolution is for an amendment to the existing Brown and Caldwell contract for the additional work that is required from the change in scope, adding $3,698,139 to the total contract amount.
Industry standard indicates that design fees should be roughly 10% of the cost of construction. With this contract amengement, total design costs are estimated at $12.5 million, which is less than 10% of the total construction cost.
Additional support will be required through completion of construction and an additional amendment is anticipated in December 2022.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
Council approved the award of the design contract to Brown & Caldwell in 2019 and the change in scope was made in early 2022. This cost was anticipated in the total estimated project amount of $155 million.
STAFF RECOMMENDATION
Approve the contract amendment resolution, allowing design work to continue and the project to move forward as scheduled.
CONSTRUCTION CONTRACT - Garney Companies, Inc.
In 2020, the city conducted a formal solicitation process to identify a contractor to construct the new water treatment plant. The solicitation resulted in four responses and Garney Companies, Inc. was selected for the project.
The proposed resolution is for the first two phases of the construction which total $50,755,401. These phases will include earthwork, foundation work, and the purchase of long lead materials needed for the project.
This contract will be amended with a Phase III scope of work that will come when the design is 60% complete, which is estimated for December 2022. That amendment is estimated to be for $100 million, bringing the construction total to $150 million.
The following tables outline the specific items included in the first two phases of the construction contract.
|
Early Procurement Package 1 |
|
|
$ 24,375,892 |
|
Garney General Conditions / Offices / Warehouse |
|
|
$ 3,332,768 |
|
Beebe Well House, Permits, Testing |
|
|
$ 1,886,213 |
|
Site Prep and Grading |
|
|
$ 1,102,917 |
|
Stormwater Management |
|
|
$ 89,469 |
|
Demolition |
|
|
$ 524,397 |
|
Dewatering |
|
|
$ 250,970 |
|
Shoring |
|
|
$ 153,417 |
|
Structure Excavation PB and PS |
|
|
$ 4,564,283 |
|
Fencing |
|
|
$ 604,899 |
|
Relocate 18" Water Line |
|
|
$ 450,879 |
|
Relocate 4" Sewer Line |
|
|
$ 176,648 |
|
Temporary Power |
|
|
$ 559,061 |
|
Div 11 Equipment |
|
|
$ 10,142,972 |
|
WWTP Chemical Building |
|
|
$ 537,000 |
|
|
|
|
|
|
Early Procurement Package 2 |
|
|
$ 26,379,510 |
|
Div 3 Concrete - Process Building |
|
|
$ 8,500,082 |
|
Div 3 Concrete - DCB-FWPS |
|
|
$ 8,262,076 |
|
Div 5 Metals |
|
|
$ 34,022 |
|
Div YP Yard Pipe |
|
|
$ 9,583,330 |
|
|
|
|
|
|
|
|
|
|
|
Total of Both Packages |
|
|
$ 50,755,401 |
|
|
|
|
|
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
Council approved the award of the construction proposal to Garney Companies, Inc. in 2020. This cost was anticipated in the total estimated project amount of $155 million.
STAFF RECOMMENDATION
Approve the contract amendment resolution, allowing construction work to move forward as planned and the groundbreaking to occur as scheduled in July 2022.
ITEM #3 - RESOLUTION TO APPROVE REIMBURSEMENT OF COSTS
PROJECT FINANCING - WATER REVENUE BONDS
The project will be financed by the issuance of Water Revenue Bonds, which are bonds financed by the future revenues of the Water Enterprise Fund. The first round of bonds are scheduled for issuance in October 2022. This resolution approves reimbursement of construction costs from the bond proceeds for expenses paid prior to the issuance of bonds but after the date of the resolution.
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
This standard resolution is an important first step in the borrowing process to ensure that the proceeds received later in the year can be used to reimburse construction costs. The resolution does not obligate any borrowing or set any borrowing terms.
STAFF RECOMMENDATION
Approve the resolution approving reimbursement of costs related to construction from bond proceeds.
OPTIONS FOR COUNCIL CONSIDERATION
Ø Approve the proposed ordinances and resolutions as presented, supporting the project timeline moving forward as scheduled.
o Ordinance - Water Rates
o Resolution - Design Contract Amendment
o Resolution - Construction Contract
o Resolution - Reimbursement of Costs from Bond Proceeds
Ø Reject the proposed ordinances and resolutions and request that staff explore additional options. This will delay the project timeline.
ATTACHMENTS
Ordinance - Water Rates
Resolution - Brown & Caldwell, Inc.
Resolution - Garney Companies, Inc.
Resolution - Reimbursement of Costs from Bond Proceeds
July 2022 Proposed Rate Sheet
January 2023 Proposed Rate Sheet
Powerpoint Presentation