Departments of Finance and Utilities
Reference: Water Treatment Plant and Rate Discussion
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: May 17, 2022
PURPOSE
To provide City Council with updates and recommendations regarding a proposed reset of the water rate reduction approved in 2019, the Water Treatment Plant and related financing including a proposed Water Treatment Plant Fee, and proposed enhancements to the Water Assistance Program to support income-qualified customers.
STRATEGIC FOCUS AREAS
Innovative, Data-Driven, Results-Focused City Government
Financially Responsible
Supportive, Sustainable Infrastructure
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, operate 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 UPDATE AND MILESTONES
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:
Capacity Increase: 10 MGD
Growth Outlook: 25 Years
Cost: $155 million
Processing Update: Discontinuation of RO process which removes brine discharge
PROJECT UPDATE AND MILESTONES
The project is moving forward with the following major milestones ahead.
Groundbreaking: July 26, 2022
Design Completion: September 2023
Project Completion: July 2025
WATER TREATMENT PLANT FINANCING
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 ordinances passed by City Council. City staff propose adding this program to the Municipal Code, while allowing the City Manager to create policies to manage the program and develop criteria for eligibility for participants. 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, a 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 $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 in the policy to be developed:
• 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 and has already supported more than 60 customers in 2022. Because the program for 2022 is 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
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.
NEXT STEPS
If the proposed ordinances are approved today, the next milestones will be as follows:
• June 7 - City Council Meeting
o Rate Reset and Water Treatment Plant Fee - Final Reading
o Water Assistance Program Updates - Final Reading
o Bond Reimbursement Resolution
o Water Treatment Plant Construction Contract
• July 26 - Groundbreaking Ceremony
OPTIONS FOR COUNCIL CONSIDERATION
Ø Approve the proposed ordinances for water rates and the water assistance program adjustments as presented. This will support the project moving forward as scheduled.
Ø Reject the proposed ordinances and request that staff explore additional options. This will delay the project timeline.
ATTACHMENTS
Ordinance - Water Rate Reset and Water Treatment Plant Fee
Ordinance - Water Assistance Program Updates
Proposed Rate Sheet - July 2022
Proposed Rate Sheet - January 2023
Powerpoint Presentation