City of San Carlos Sewer Financial Plan & Rate Update

Transcription

1 City of San Carlos Sewer Financial Plan & Rate Update Revised 06/13/16

2 1889 Alcatraz Avenue Berkeley, CA Tel: June 13, 2016 City of San Carlos Department of Public Works 600 Elm Street San Carlos, CA Re: Sewer Financial Plan & Rate Update Bartle Wells Associates is pleased to submit the attached Sewer Financial Plan & Rate Update. The report develops updated 10 year financial projections for the City s sewer enterprise and projects rate increases needed to fund the future costs of providing sewer service. The City has provided strong financial stewardship of the sewer enterprise by raising rates each year over the past decade. Most recently, the City adopted substantial rate increases in 2013 that were phased in over the past three fiscal years. In 2013, the City also adopted modifications to its sewer rate structure designed to improve rate equity between customer classes. Starting in fiscal year 2014/15, the City implemented a reduced annual sewer service charge for multi family residential dwelling units. The City s sewer rate increases have improved the sewer enterprise s financial health and put the enterprise in good fiscal position for addressing its future financial challenges. BWA developed two rate increase alternatives including: a) steady, gradual 5% annual sewer rate increases for each of the next three fiscal years, and b) a reduced rate increase alternative with no rate increase in 2016/17 followed by two years of annual 5% rate increases. Financial projections indicate the City would likely need to adopt slightly higher rate increases in future years with the reduced rate increase alternative. The proposed rate increases are needed to ensure adequate funding for a) operating and maintenance expenses of the City and Silicon Valley Clean Water (SVCW), b) a prudent level of pay as you go funding for capital improvements to the City s aging collection system, and c) the City s share of costs for a major rehabilitation and reconstruction of SVCW s regional wastewater transmission and treatment facilities. No additional rate structure modifications are recommended at this time. We enjoyed working with the City on this assignment and appreciate the input and assistance received from City staff. Please contact us if you ever have any questions about the findings and recommendations presented in the report or other related issues. Alex Handlers, CIPMA Catherine Tseng, CIPMA Principal Senior Financial Analyst

3 TABLE OF CONTENTS 1. Background & Objectives... 1 Background... 1 Objectives Current & Historical Sewer Rates... 3 Current & Historical Sewer Rates... 3 Regional Sewer Rate Survey Financial Challenges & SVCW Funding Requirements... 6 Financial Challenges... 6 SVCW Funding Requirements... 7 Outstanding & Projected SVCW Debt Service Financial & Rate Projections Financial Projections Rate Projections Reduced Rate Increase Alternative Rate Projections with Reduced Near Term Rate Increases Sewer Rate Structure & Potential Modifications Current Sewer Rate Structure Sewer Rate Structures in California Potential Sewer Rate Structure Alternatives Regional Residential Sewer Rate Structures Low Income Discount List of Tables Table 1 Historical Sewer Rates... 4 Table 2 San Carlos Long Term SVCW Funding Requirements... 7 Table 3 San Carlos Share of Outstanding SVCW Debt... 8 Table 4 San Carlos Share of Future SVCW Debt... 8 Table 5 San Carlos Sewer Cash Flow Projections Table 6 Projected Sewer Rates Table 7 San Carlos Sewer Cash Flow Projections with Reduced Near Term Rate Increases Table 8 Projected Sewer Rates with Reduced Near Term Rate Increases Table 9 Residential Sewer Rate Structure Comparison List of Figures Figure 1 Single Family Residential Sewer Rate Survey... 5 Figure 2. Projected Sewer Revenues & Expenses Figure 3. Historical & Projected Single Family Annual Sewer Charges Figure 4. Projected Sewer Revenues & Expenses with Reduced Near Term Rate Increases Figure 5. Historical & Projected Single Family Annual Sewer Charges Table of Contents

4 1. Background & Objectives Background The City of San Carlos is located in San Mateo County, California, roughly halfway between the Cities of San Francisco and San Jose. The City encompasses roughly six square miles and has a population of approximately 29,500. The City was incorporated in 1925 and is governed by a five member City Council whose members are elected at large from the community. The City owns and operates a wastewater collection system consisting of roughly 105 miles of sewer pipelines and 6 sewer pump stations. Wastewater is conveyed from the City to a regional wastewater treatment plant operated by Silicon Valley Clean Water (SVCW). SVCW is a joint powers authority whose members include San Carlos, Belmont, Redwood City, and the West Bay Sanitary District. Since 2008, SVCW has been rebuilding, rehabilitating, and upgrading its wastewater transmission and treatment facilities. The City provides sewer service to approximately 11,100 residential and commercial sewer connections within the City. Residential customers account for roughly 90% of total accounts and 80% of wastewater flows. The City also conveys wastewater from four San Mateo County sewer maintenance districts to SVCW pursuant to agreements with each agency. The City s sewer utility is accounted for as a self supporting enterprise fund. Revenues are derived primarily from sewer service charges. As such, the City s sewer rates need to be set at levels adequate to fund the costs of providing wastewater service. The sewer rate increases proposed in this report are designed to a) fund the costs of operating and maintaining the City s sewer collection system and regional wastewater treatment plant, b) fund high priority pipeline repairs and replacements in the City s aging sewer collection system, and c) fund the City s share of costs for a major rehabilitation and reconstruction of the regional treatment plant and influent force main. Objectives In 2014, the City retained Bartle Wells Associates (BWA) to update sewer enterprise financial projections and develop sewer rate recommendations. Key objectives of this study include: Develop updated sewer enterprise financial projections to evaluate annual revenue requirements. Evaluate residential sewer rate alternatives. Recommend sewer rates designed to: Fund the costs of providing service including operating, capital, and debt service requirements and maintain long term financial health 1

5 Be fair and equitable to all customers. Comply with the legal requirements of Proposition 218. BWA previously assisted the City with development of a Sewer Financial Plan & Rate Study in 2013 and a subsequent evaluation of alternative residential sewer rate structures in These prior studies recommended a) substantial sewer rate increases phased in over three years, b) some relatively minor modifications to the City s sewer rate structure designed to improve rate equity, and c) adoption of a reduced annual charge for multi family residential accounts. 2

6 2. Current & Historical Sewer Rates Current & Historical Sewer Rates Table 1 shows a history of the City s sewer rates. The City has provided good financial stewardship by raising rate in each of the past 10 years in order to keep revenues aligned with the cost of service and ensure adequate funding for the City s share of costs for rebuilding and rehabilitating the regional wastewater treatment plant and conveyance system. Prior to the last 10 years, the City did not raise sewer rates from approximately 1996 through Rate increases were last adopted in 2013, when the City implemented a 3 year rate increase culminating with current year rates. Residential customers pay a flat annual sewer service charge per each residential dwelling unit. In 2014/15, the City began levying a reduced charge for multi family residential dwelling units. Commercial and institutional accounts pay volumetric charges based on metered water use, with higher rates for customer types with higher strength wastewater. Industrial accounts are billed based on both water use and wastewater strength loadings. Non residential sewer charges are subject to a minimum annual charge equal to 75% of the single family rate. Sewer service charges are billed annually, predominantly via the San Mateo County property tax rolls. San Mateo County is on the Teeter Plan and provides the City with 100% of it billed sewer service charges. Pursuant to contracts between the City and San Mateo County, the four County operated sewer maintenance districts are charged 80% of the City s residential sewer rate per each residential dwelling unit or commercial/industrial equivalent to fund costs of conveyance and wastewater treatment. 3

7 Table 1 Historical Sewer Rates July 1 July 1 July 1 July 1 July 1 July 1 July 1 July 1 July 1 July 1 Effective Date RESIDENTIAL Annual charge per residential dwelling unit Single Family $ $ $ $ $ $ $ $ $ $1, Multi Family same as SFR same as SFR same as SFR same as SFR same as SFR same as SFR same as SFR same as SFR COMMERCIAL Volumetric charges per hundred cubic feet of water use, subject to a minimum annual charge. High Strength/Restaurants 1 $5.70 $6.96 $7.80 $8.35 $8.93 $9.56 $10.13 $13.05 $15.66 $17.23 Moderate Strength (includes hotels) 2 n/a n/a n/a n/a n/a n/a n/a Standard Strength/All Others Minimum Annual Charge Per Parcel or Account 3 $ $ $ $ $ $ $ $ $ $ INSTITUTIONAL Volumetric charges per hundred cubic feet of water use, subject to a minimum annual charge. Hospitals $3.64 $4.44 $4.98 $5.33 $5.70 $6.10 $6.47 $8.47 $10.16 $11.18 School/Church/Public/Other Minimum Annual Charge Per Parcel or Account 3 $ $ $ INDUSTRIAL Volumetric Charge ($ per hundred cubic feet of water u $3.12 $3.80 $4.26 $4.56 $4.88 $5.22 $5.53 $6.79 $8.15 $ Biological Oygen Demand (BOD) ($ per pound) Suspended Solids (SS) ($ per pound) Flat charge per account Minimum Annual Charge Per Parcel or Account 3 $ $ $ Includes restaurants, bakeries, mortuaries, markets with garbage disposals, and mixed use accounts whose wastewater is comprised of 75% or higher flow from highstrength users. Prior to July 1, 2013, the City had a separate rate for Markets with Disposals and Mortuaries that was a little over 98% of the Restaurant rate. 2 Includes hotels with food service and/or laundry facilities, and mixed use accounts whose wastewater is comprised of greater than 25% but less than 75% of flow from high strength users. 3 The City has historically only billed standard strength commercial customers a minimum charge equal to 100% of the annual residential sewer charge. Effective 07/01/13 minimum charge was reduced to 75% of the residential rate but was consistently applied to all non residential parcels or accounts. The City shall determine which customer class best reflects the wastewater characteristics of each account. 4

8 Regional Sewer Rate Survey The City s sewer rates are currently in the upper middle range compared to other regional sewer agencies located in San Mateo County as shown below. The City s single family residential sewer charge of $1, per year equates to $88.82 per month. Figure 1 Single Family Residential Sewer Rate Survey A number of other regional agencies are in the middle of multi year sewer rate increases or are anticipating rate increases in upcoming years. Some of these agencies are anticipating more substantial rate increases than the levels projected for San Carlos in this report. BWA anticipates that the City s rate will remain in the upper middle range compared to other regional agencies in upcoming years. 5

9 3. Financial Challenges & SVCW Funding Requirements Financial Challenges The City s sewer enterprise has been facing a number of financial challenges in recent years that have required substantial rate increases. Key financial challenges include: Rehabilitation of SVCW Treatment Plant & Conveyance System SVCW is in the process of rebuilding, rehabilitating, and upgrading its wastewater transmission and treatment facilities, which are approaching the end of their useful operating lives. SVCW initially developed a10 year capital improvement program and financial plan in 2008 to provide a proactive roadmap for addressing SVCW s capital needs. Based on SVCW s latest estimates, the total capital program is expected to cost approximately $790 mllion. San Carlos is responsible for 15.14% of project costs, equating to approximately $120 million. A portion of SVCW s capital program has already been financed. San Carlos share of the remaining $570 million in future financing needs equals a little over $86 million. SVCW has been pursuing a combination of low rate State Revolving Fund (SRF) loans supplemented by bond financing. San Carlos share of SVCW debt service is projected to ramp up from the current level of $1.5 million in 2015/16 to about $6.3 million per year within the upcoming decade. To date, SVCW related debt service has come online slower than previously anticipated, but is projected to ramp up steeply in upcoming years. Required Upgrades & Replacement of the City s Aging Sewer Collection System The City is in the process of completing approximately $8 million of sewer system capacity assurance projects designed to minimize the potential for sanitary sewer overflows and meet the legal requirements of a Consent Decree with San Francisco Baykeeper. The City budgeted about half of the project costs in prior years and has budgeted the final $4 million of costs in the current fiscal year 2015/16. The City anticipates completing these projects by approximately April Additionally, many of the City s sewer pipelines are over 50 years old, constructed of vitrified clay, and will need to be replaced in upcoming years. The City anticipates funding roughly $4 million per year in pipeline replacements over the next decade. The City also anticipates needing to fund roughly $1 million per year for on call repairs and improvements to its aging facilities. Combined, the City anticipates funding about $5 million per year to address existing system deficiencies and support long term reliability. 6

10 Ongoing Cost Inflation In addition to other financial needs, small annual rate adjustments are needed to keep revenues in line with ongoing operating cost inflation, both for City operating expenses as well as SVCW operations. SVCW Funding Requirements Table 2 shows a projection of the City s share of SVCW funding requirements over the next decade based on information provided in SVCW s Long Term Financial Plan updated in January The City s total share of SVCW expenses is projected to roughly double over the next decade, from roughly $5.4 to $10.9 million, largely due to increased debt financing requirements for SVCW s capital improvement program. Table 2 San Carlos Long Term SVCW Funding Requirements City of San Carlos' SVCW Projected Funding Requirement 2015/ / / / / / / / / / /26 SVCW Operations 3,584,345 3,715,670 3,851,839 3,993,033 3,764,076 3,929,537 4,048,931 4,161,566 4,266,311 4,361,938 4,458,414 Existing Bonds 1,433,328 1,789,868 1,687,544 1,685,044 1,686,029 1,582,460 1,581,599 1,581,061 1,579,900 1,581,448 1,577,942 Existing SRF Loans 124, , , , , , , , , , ,500 New Bonds 227, , , , , , , ,950 New SRF Loans 92,270 1,151,969 1,640,059 2,578,444 3,364,772 3,485,623 3,909,096 3,909,096 3,909,096 Capital 86, , , , , , , , , , ,400 Operating Reserves 27,101 12,072 12,518 12,980 (21,047) 15,210 10,976 10,354 9,629 8,791 8,869 (SRF/CIP) 109, , , , , , , ,868 TOTAL 5,364,686 6,777,974 7,018,689 8,366,222 8,738,135 9,503,397 10,073,069 10,290,322 10,710,786 10,807,123 10,900,171 ProjectedSVCWCashFlowRequirements San Carlos Source: SVCW Long Term Financial Plan January Outstanding & Projected SVCW Debt Service The tables on the following pages show the City s share of outstanding and projected additional debt service for financing the City s share of SVCW s capital improvement program. Please note that the future debt projections were independently verified and calculated by BWA and are extremely close to the underlying estimates provided by SVCW. 7

11 City of San Carlos' Share of Outstanding SVCW Debt Fiscal Year Senior Lien Debt Service Subordinate SRF Payments Total Debt Service Ending Bonds (BABs) Subtotal Admin WWTP Gross Net of June 30 Bonds Gross Credit1 Net1 Bonds Bonds2 (Net of Credit) Building Project3 Subtotal Total 2009 Credit Table 3 San Carlos Share of Outstanding SVCW Debt , ,175 (190,043) 564, ,163 60,449 1,359, , ,147 1,673,687 1,483, ,113 (187,502) 562, , ,400 1,671, , , ,122 2,338,129 2,150, ,907 (184,075) 565, , ,550 1,676, , , ,122 2,339,990 2,155, ,691 (180,420) 563, , ,000 1,680, , , ,122 2,339,558 2,159, ,934 (89,261) 384, , ,075 1,643, , , ,122 2,211,943 2,122, , ,750 1,570, , , ,122 2,050,018 2,050, , ,375 1,568, , , ,122 2,047,476 2,047, , ,125 1,570, , , ,122 2,049,393 2,049, , ,750 1,575, , , ,122 2,054,642 2,054, , ,250 1,574, , , ,122 2,054,059 2,054, , ,000 1,563, , , ,122 2,042,976 2,042, , ,000 1,562, , , ,122 2,041,352 2,041, , ,875 1,563, , , ,122 2,042,934 2,042, , ,500 1,564, , , ,122 2,043,434 2,043, , ,875 1,563, , , ,122 2,042,809 2,042, , ,500 1,464, , , ,122 1,943,518 1,943, , ,250 1,471, , , ,122 1,950,393 1,950, , ,750 1,466, , , ,122 1,946,018 1,946, , ,125 1,466, , ,976 1,821,330 1,821, , ,250 1,463, , ,976 1,818,619 1,818, , ,000 1,465, , ,976 1,820,971 1,820, , ,375 1,461, ,461,287 1,461, , ,375 1,459, ,459,994 1,459, , ,875 1,457, ,457,787 1,457, , ,875 1,453, ,453,745 1,453, , ,500 1,013, ,013,852 1,013, , ,125 1,014, ,014,686 1,014, , ,000 1,015, ,015,104 1,015, , ,125 1,014, ,014,188 1,014, , , , , , , , ,000 Table 4 San Carlos Share of Future SVCW Debt 1 Assumes the Refundable Credit is reduced due to sequestration by 6.8% through 10/01/15 and 6.9% starting 10/01/16. 2 Excludes debt service payments made from escrow funds. 3 Preliminary debt service estimates shown; final amounts will be determined after the project is completed. Assumes first debt payment invoiced in 2016/17. Note: Excludes potential payments for SVCW's Line of Credit. 8

12 City of San Carlos' Share of Future SVCW Debt Projected Financing Project Cost by Year of Construction Awards Debt Issue Project Description Award Projected Future SVCW Financings SRF 1 Conveyance Planning ,400, SRF 2 WWTP Improvements Phase ,691, SRF 3 Food Waste ,830, SRF 4 Headworks ,312, SRF 5 Tunnel/Pipeline Phase ,304, SRF 6 Receiving Lift Station Phase ,184, SRF 7 WWTP Improvements Phase ,005, SRF 8 Nutrient Removal Phase ,000, SRF 9 Pump Station Rehab Phase ,750, SRF 10 Tunnel/Pipeline Phase ,857, SRF 11 Receiving Lift Station Phase ,114, SRF 12 Peak Diversion Facility ,540,000 - SRF 13 Nutrient Removal Phase ,000,000 - SRF 14 Pump Station Rehab Phase ,227,000 Bond 1 Future Bond Issue ,000, Bond 2 Future Bond Issue ,692,000 - Total 1,400, ,321,000 36,005, ,721,000 87,232,000 55,227,000 Cumulative 1,400, ,721, ,726, ,447, ,679, ,906,000 Project Financing SRF Loans 1,400, ,321,000 12,005, ,721,000 75,540,000 55,227,000 Bonds ,000,000-11,692,000 - Estimate of Annual Debt Service per $10 Million of Project Funding SRF Loans (2.5%, 30-Year) 400, , , , , ,000 Bonds (5.5%, 30-Year) 750, , , , ,000 Estimated Annual Debt Service SRF Loans 56,000 9,766, ,000 8,286,000 3,777,000 2,761,000 Bonds - - 1,800, ,000 - Total 56,000 9,766,000 2,400,000 8,286,000 4,654,000 2,761,000 Cumulative 56,000 9,822,000 12,222,000 20,508,000 25,162,000 27,923,000 Allocation of Cumulative Debt to Member Agencies Belmont 9.45% 5, ,000 1,155,000 1,938,000 2,378,000 2,639,000 Redwood City 48.57% 27,000 4,771,000 5,936,000 9,961,000 12,221,000 13,562,000 San Carlos 15.14% 8,000 1,487,000 1,850,000 3,105,000 3,810,000 4,228,000 West Bay SD 26.84% 15,000 2,636,000 3,280,000 5,504,000 6,753,000 7,495,000 9

13 4. Financial & Rate Projections Financial Projections Bartle Wells Associates developed 10 year cash flow projections to evaluate sewer enterprise revenue requirements and rate increases. The financial projections are based on the City s 2015/16 sewer enterprise budget and a number of slightly conservative assumptions. Key Cash Flow Assumptions: Sewer service charge revenues are projected based on current year actual billings and increase due to projected rate adjustments and growth. The City is currently experiencing an increase in development. For financial planning purposes, the projections include a placeholder estimate of growth at 50 new single family homes or equivalents per year for the next three fiscal years. The projections assume lower growth of 10 new single family homes or equivalents annually in future years. Sewer connection fee revenues are based on projected growth and assume an increase in the City s share of its sewer capacity charge to $5,000 per single family home or equivalent. City operating and maintenance costs are based on the City s 2015/16 Budget and escalate at the annual rate of 4%. The City s share of SVCW expenses are based on SVCW s Long Term Financial Plan recently updated in January These costs including operating, capital, and debt service expenses, as well as required reserve requirements for the State Revolving Fund (SRF) low rate financing program. Funding for City sewer collection system capital improvements include: o The final $4 million of funding for capacity assurance improvements required by the Consent Decree, budgeted in 2015/16. This amount supplements prior funding that the City has previously budgeted and set aside. o Approximately $3 million of collection system repairs and replacements in both 2015/16 and 2016/17, during years while the City is constructing its capacity assurance projects. o $5 million per year of future annual sewer system repairs and replacements including $4 million per year for replacement of aging sewer pipelines plus $1 million per year for on call repairs and other improvements. This level of funding is escalated at the annual rate of 3% after 2019/20. Wastewater enterprise cash flow projections are shown on Table 5. The rate projections are designed to fund the City s cost of providing service while maintaining roughly balanced budgets and prudent levels of fund reserves each year. 10

14 Table 5 San Carlos Sewer Cash Flow Projections San Carlos Wastewater Cash Flow Projections 2015/ / / / / / / / / /25 Overall Rate Adjustment 10% 5% 5% 5% 5% 5% 5% 3% 3% 3% Annual Residential Sewer Charge $1,066 $1,119 $1,175 $1,234 $1,296 $1,361 $1,429 $1,471 $1,516 $1,561 City Residential Connection Fee $2,364 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 Growth (EDUs) Growth % 0.34% 0.34% 0.34% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% Cost Escalation 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Interest Earnings Rate 0.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Beginning Fund Reserves $12,974,000 $11,658,000 $13,826,000 $14,421,000 $14,408,000 $14,587,000 $14,609,000 $14,725,000 $14,864,000 $14,832,000 REVENUES Sewer Service Charges, City Customers 16,040,000 16,899,000 17,804,000 18,757,000 19,708,000 20,707,000 21,757,000 22,425,000 23,113,000 23,822,000 Sewer Service Charges, County Districts 460, , , , , , , , , ,000 Connection Fees 45, , , ,000 50,000 50,000 50,000 50,000 50,000 50,000 Investment Earnings 58,000 58, , , , , , , , ,000 Allocation In (Reimbursement) 365, , , , , , , , , ,000 Total Revenues 16,968,000 18,070,000 19,094,000 20,094,000 20,888,000 21,934,000 23,031,000 23,736,000 24,464,000 25,212,000 EXPENSES Operating & Maintenance Salaries & Benefits 1,909,000 1,985,000 2,064,000 2,147,000 2,233,000 2,322,000 2,415,000 2,512,000 2,612,000 2,716,000 General Fund Allocation 1,943,000 2,021,000 2,102,000 2,186,000 2,273,000 2,364,000 2,459,000 2,557,000 2,659,000 2,765,000 Professional Services 494, , , , , , , , , ,000 Other Operating 192, , , , , , , , , ,000 Capital Outlay 54,000 56,000 58,000 60,000 62,000 64,000 67,000 70,000 73,000 76,000 Transfers Out 563, , , , , , , , , ,000 General Liability & Workers Comp Alloc 791, , , , , ,000 1,002,000 1,042,000 1,084,000 1,127,000 SVCW Operating Expenses 3,584,000 3,716,000 3,852,000 3,993,000 3,764,000 3,930,000 4,049,000 4,162,000 4,266,000 4,362,000 Total O&M 9,530,000 9,901,000 10,284,000 10,681,000 10,719,000 11,162,000 11,571,000 11,985,000 12,402,000 12,823,000 Debt Service Senior Debt (SVCW Bonds) CityShare of SVCW2008Bonds 89, City Share of SVCW 2009 Bonds 754, , , , , Less Refundable Credit for 2009 Bonds (190,000) (188,000) (184,000) (181,000) (89,000) City Share of SVCW 2014 Bonds 646, , , , , , , , , ,000 City Share of SVCW 2015 Bonds 60, , , , , , , , , ,000 City's Share of Future SVCW Bonds , , , , , , ,000 Subtotal Senior Debt 1,359,000 1,670,000 1,677,000 1,907,000 1,871,000 1,920,000 1,917,000 1,919,000 1,925,000 1,924,000 Subordinate Debt City Share of Existing SVCW SRF Loans 124, , , , , , , , , ,000 City Share of Future SVCW SRF Loans ,000 1,152,000 1,640,000 2,578,000 3,365,000 3,486,000 3,909,000 3,909,000 City Share of SVCW Line of Credit Pymts 15,000 25,000 25,000 25,000 25,000 5, Subtotal 139, , ,000 1,656,000 2,144,000 3,062,000 3,844,000 3,965,000 4,388,000 4,388,000 Total Combined Debt Service 1,498,000 2,174,000 2,273,000 3,563,000 4,015,000 4,982,000 5,761,000 5,884,000 6,313,000 6,312,000 Capital & Other Non Operating City Sewer Rehab Improvements 1,500,000 3,000,000 4,000,000 4,000,000 4,000,000 4,120,000 4,240,000 4,370,000 4,500,000 4,640,000 City On Call Repair/Replacement & Other 1,533, ,000,000 1,000,000 1,000,000 1,030,000 1,060,000 1,090,000 1,120,000 1,150,000 City Capacity Assurance Improvements 4,000, SVCW Pay Go Capital & O&M Rsrv Contribs 114, , , , , , , , , ,000 SVCW SRF Reserve Requirement 109, , , , , , , , Subtotal 7,256,000 3,827,000 5,942,000 5,863,000 5,975,000 5,768,000 5,583,000 5,728,000 5,781,000 5,950,000 Total Expenses 18,284,000 15,902,000 18,499,000 20,107,000 20,709,000 21,912,000 22,915,000 23,597,000 24,496,000 25,085,000 Revenues Less Expenses (1,316,000) 2,168, ,000 (13,000) 179,000 22, , ,000 (32,000) 127,000 Ending Fund Reserves 11,658,000 13,826,000 14,421,000 14,408,000 14,587,000 14,609,000 14,725,000 14,864,000 14,832,000 14,959,000 Debt Svc Covg on Senior Debt (SVCW Bonds) Debt Service Coverage on All Debt Days Operating Cash on Hand

15 Figure 2 shows a 10 year projection of revenues vs. expenses, with expenses are broken out into key functional categories. The City anticipates that the sewer enterprise will face a budget deficit in the current fiscal year 2015/16 due to funding of an elevated level of capital projects, followed by a budget surplus in 2016/17 due to a reduced level of new capital funding while the City completes its capacity assurance projects. As shown below, the proposed rate increases are designed to result in roughly balanced budgets in future years. Figure 2. Projected Sewer Revenues & Expenses Based on average annual expenses over the 5 year period from 2015/16 through 2019/20, the following major cost categories account for the following shares of total expenses: City Operating & Maintenance Costs: 34% City Capital Improvements: 27% SVCW Operating & Maintenance Costs: 20% SVCW Debt Service/Capital/Reserves: 19% 12

16 Rate Projections The financial projections indicate that the sewer enterprise can meet its future financial needs and maintain roughly balanced budgets with steady, gradual 5% annual rate adjustments over the next decade. Table 6 shows a 3 year projection of sewer rates. The City can update its financial projections in future years to re evaluate future rate increases. Table 6 Projected Sewer Rates Current July 1 July 1 July 1 Effective Date Rates RATE INCREASE % 5% 5% 5% RESIDENTIAL Fixed annual charge per residential dwelling unit Single Family Residence $1, $1, $1, $1, Multi Family Dwelling Unit , , COMMERCIAL Volumetric charges per hundred cubic feet of metered water use ($/hcf), subject to a minimum annual charge High Strength/Restaurants 1 $17.23 $18.09 $18.99 $19.94 Moderate Strength (includes hotels) Standard Strength/All Others Minimum Annual Charge Per Parcel or Account $ $ $ $ INSTITUTIONAL Volumetric charges per hundred cubic feet of metered water use ($/hcf), subject to a minimum annual charge Hospitals $11.18 $11.74 $12.33 $12.95 School/Church/Public/Other Minimum Annual Charge Per Parcel or Account $ $ $ $ INDUSTRIAL Volumetric Charge ($ per hundred cubic feet of water use) $8.97 $9.42 $9.89 $ Biological Oygen Demand (BOD), ($ per pound) Suspended Solids (SS), ($ per pound) Minimum Annual Charge Per Parcel or Account $ $ $ $ Includes restaurants, bakeries, mortuaries, markets with garbage disposals, and mixed use accounts whose wastewater is comprised of 75% or higher flow from high strength users. 2 Includes hotels with food service and/or laundry facilities, and mixed use accounts whose wastewater is comprised of greater than 25% but less than 75% of flow from high strength users. The City shall determine which customer class best reflects the wastewater characteristics of each account. Note: One hundred cubic feet (hcf) equals approximately 748 gallons. 13

17 Figure 3 below shows a 20 year history of single family residential sewer charges along with projected rates for the next three fiscal years. Over the period shown, historical and projected rate increases result in annual charges equivalent to the City s 1996 rate escalated at the annual rate of 6.9%. Figure 3. Historical & Projected Single Family Annual Sewer Charges 14

18 Reduced Rate Increase Alternative In addition to the base case cash flow projections, BWA also developed alternative financial and rate projections with no rate increase in 2016/17 followed by two years of annual 5% rate increases. The alternative projections incorporate the same assumptions as the base financial projections. The projections indicate the City would likely need to adopt slightly higher rate increases in future years with reduced near term rate increases. The table on the following page shows the alternative cash flow projections with reduced rate increases over the next three fiscal years. 15

19 Table 7 San Carlos Sewer Cash Flow Projections with Reduced Near Term Rate Increases San Carlos Wastewater Cash Flow Projections With No Rate Increase in 2016/ / / / / / / / / / /25 Overall Rate Adjustment 10% 0% 5% 5% 6% 6% 6% 5% 3% 3% Annual Residential Sewer Charge $1,066 $1,066 $1,119 $1,175 $1,246 $1,321 $1,400 $1,470 $1,514 $1,559 City Residential Connection Fee $2,364 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 Growth (EDUs) Growth % 0.34% 0.34% 0.34% 0.07% 0.07% 0.07% 0.07% 0.07% 0.07% Cost Escalation 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Interest Earnings Rate 0.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Beginning Fund Reserves $12,974,000 $11,658,000 $12,999,000 $12,715,000 $11,768,000 $11,141,000 $10,504,000 $10,130,000 $10,199,000 $10,096,000 REVENUES Sewer Service Charges, City Customers 16,040,000 16,095,000 16,957,000 17,865,000 18,950,000 20,101,000 21,321,000 22,402,000 23,090,000 23,799,000 Sewer Service Charges, County Districts 460, , , , , , , , , ,000 Connection Fees 45, , , ,000 50,000 50,000 50,000 50,000 50,000 50,000 Investment Earnings 58,000 58, , , , , , , , ,000 Allocation In (Reimbursement) 365, , , , , , , , , ,000 Total Revenues 16,968,000 17,243,000 18,215,000 19,160,000 20,082,000 21,275,000 22,541,000 23,666,000 24,393,000 25,141,000 EXPENSES Operating & Maintenance Salaries & Benefits 1,909,000 1,985,000 2,064,000 2,147,000 2,233,000 2,322,000 2,415,000 2,512,000 2,612,000 2,716,000 General Fund Allocation 1,943,000 2,021,000 2,102,000 2,186,000 2,273,000 2,364,000 2,459,000 2,557,000 2,659,000 2,765,000 Professional Services 494, , , , , , , , , ,000 Other Operating 192, , , , , , , , , ,000 Capital Outlay 54,000 56,000 58,000 60,000 62,000 64,000 67,000 70,000 73,000 76,000 Transfers Out 563, , , , , , , , , ,000 General Liability & Workers Comp Alloc 791, , , , , ,000 1,002,000 1,042,000 1,084,000 1,127,000 SVCW Operating Expenses 3,584,000 3,716,000 3,852,000 3,993,000 3,764,000 3,930,000 4,049,000 4,162,000 4,266,000 4,362,000 Total O&M 9,530,000 9,901,000 10,284,000 10,681,000 10,719,000 11,162,000 11,571,000 11,985,000 12,402,000 12,823,000 Debt Service Senior Debt (SVCW Bonds) City Share of SVCW 2008 Bonds 89, City Share of SVCW 2009 Bonds 754, , , , , Less Refundable Credit for 2009 Bonds (190,000) (188,000) (184,000) (181,000) (89,000) City Share of SVCW 2014 Bonds 646, , , , , , , , , ,000 City Share of SVCW 2015 Bonds 60, , , , , , , , , ,000 City's Share of Future SVCW Bonds , , , , , , ,000 Subtotal Senior Debt 1,359,000 1,670,000 1,677,000 1,907,000 1,871,000 1,920,000 1,917,000 1,919,000 1,925,000 1,924,000 Subordinate Debt City Share of Existing SVCW SRF Loans 124, , , , , , , , , ,000 City Share of Future SVCW SRF Loans ,000 1,152,000 1,640,000 2,578,000 3,365,000 3,486,000 3,909,000 3,909,000 City Share of SVCW Line of Credit Pymts 15,000 25,000 25,000 25,000 25,000 5, Subtotal 139, , ,000 1,656,000 2,144,000 3,062,000 3,844,000 3,965,000 4,388,000 4,388,000 Total Combined Debt Service 1,498,000 2,174,000 2,273,000 3,563,000 4,015,000 4,982,000 5,761,000 5,884,000 6,313,000 6,312,000 Capital & Other Non Operating City Sewer Rehab Improvements 1,500,000 3,000,000 4,000,000 4,000,000 4,000,000 4,120,000 4,240,000 4,370,000 4,500,000 4,640,000 City On Call Repair/Replacement & Othe 1,533, ,000,000 1,000,000 1,000,000 1,030,000 1,060,000 1,090,000 1,120,000 1,150,000 City Capacity Assurance Improvements 4,000, SVCW Pay Go Capital & O&M Rsrv Contri 114, , , , , , , , , ,000 SVCW SRF Reserve Requirement 109, , , , , , , , Subtotal 7,256,000 3,827,000 5,942,000 5,863,000 5,975,000 5,768,000 5,583,000 5,728,000 5,781,000 5,950,000 Total Expenses 18,284,000 15,902,000 18,499,000 20,107,000 20,709,000 21,912,000 22,915,000 23,597,000 24,496,000 25,085,000 Revenues Less Expenses (1,316,000) 1,341,000 (284,000) (947,000) (627,000) (637,000) (374,000) 69,000 (103,000) 56,000 Ending Fund Reserves 11,658,000 12,999,000 12,715,000 11,768,000 11,141,000 10,504,000 10,130,000 10,199,000 10,096,000 10,152,000 Debt Svc Covg on Senior Debt (SVCW Bond Debt Service Coverage on All Debt Days Operating Cash on Hand

20 Figure 2 shows a 10 year projection of revenues vs. expenses under the reduced rate increase alternative. As shown below, the reduced rate increases may result in small annual budget deficits in upcoming years until rates are gradually increased in later years to levels adequate to support balanced budgets. These projected annual deficits could be eliminated if the City reduces its near term capital spending correlating with the reduced rate increases. Figure 4. Projected Sewer Revenues & Expenses with Reduced Near Term Rate Increases 17

21 Rate Projections with Reduced Near Term Rate Increases Table 6 shows a 3 year projection of sewer rates with reduced near term rate increases including no increase in 2016/17. As noted, lower near term rate increases would result in the need for correspondingly higher rate increases in future years. Table 8 Projected Sewer Rates with Reduced Near Term Rate Increases Current July 1 July 1 July 1 Effective Date Rates RATE INCREASE % 0% 5% 5% RESIDENTIAL Fixed annual charge per residential dwelling unit Single Family Residence $1, $1, $1, $1, Multi Family Dwelling Unit , COMMERCIAL Volumetric charges per hundred cubic feet of metered water use ($/hcf), subject to a minimum annual char High Strength/Restaurants 1 $17.23 $17.23 $18.09 $18.99 Moderate Strength (includes hotels) Standard Strength/All Others Minimum Annual Charge Per Parcel or Account $ $ $ $ INSTITUTIONAL Volumetric charges per hundred cubic feet of metered water use ($/hcf), subject to a minimum annual char Hospitals $11.18 $11.18 $11.74 $12.33 School/Church/Public/Other Minimum Annual Charge Per Parcel or Account $ $ $ $ INDUSTRIAL Volumetric Charge ($ per hundred cubic feet of water $8.97 $8.97 $9.42 $ Biological Oygen Demand (BOD), ($ per pound) Suspended Solids (SS), ($ per pound) Minimum Annual Charge Per Parcel or Account $ $ $ $ Includes restaurants, bakeries, mortuaries, markets with garbage disposals, and mixed use accounts whose wastewater is comprised of 75% or higher flow from high strength users. 2 Includes hotels with food service and/or laundry facilities, and mixed use accounts whose wastewater is comprised y of greater than 25% but less than 75% of flow from high strength users. account. Note: One hundred cubic feet (hcf) equals approximately 748 gallons. 18

22 The chart below shows a 20 year history of single family residential sewer charges along with projected rates for the next three fiscal years under the reduced rate increase alternative. Over the period shown, the historical and projected rate increases result in annual charges equivalent to the City s 1996 rate escalated at the annual rate of 6.7%. Figure 5. Historical & Projected Single Family Annual Sewer Charges 19

23 5. Sewer Rate Structure & Potential Modifications Current Sewer Rate Structure The City s sewer rate structure is based on analysis developed in the Sewer Financial Plan & Rate Study completed by BWA in 2013 and subsequent analysis of residential sewer rate alternatives conducted in 2014 that resulted in the adoption of a reduced annual sewer service charge for multi family residential dwelling units. As noted earlier, the City s sewer rate structure includes: Fixed annual charges for residential customers, with a reduced charge for multi family dwelling units Consumption based charges for non residential customers, with higher volumetric charges for customer classes with higher wastewater strength, subject to a minimum monthly charge Sewer Rate Structures in California California wastewater agencies use a variety of rate structures to recover the costs of providing service. Bartle Wells Associates believes that a wide range of rate structures can be appropriate, equitable, and legally defensible, while reflecting the policy preferences of each agency. This section summarizes common types of residential and commercial wastewater rate structures used in California and provides brief background on some general issues regarding wastewater rates. Estimates of the percentage or proportion of agencies that use different types of rate structures are based on a) Bartle Wells Associate s experience with hundreds of California wastewater agencies and b) the State Water Resources Control Board s Wastewater User Charge Survey and Report, a survey of over 400 California wastewater agencies. Residential Sewer Rate Structures Fixed Rates Roughly 65% to 75% of agencies throughout California levy fixed residential sewer service charges that do not vary with changes in monthly water use. The charge is generally based on a reasonable estimate of average wastewater discharge per residential dwelling unit. o Of these agencies, roughly 50% to 60% levy the same standard charge on all residential units, while the other 40% to 50% levy reduced charges on multi family dwelling units that are typically in the range of 70% to 90% of the charge per single family home. 20

24 o A small number of agencies levy residential sewer rates that vary based on other factors such as number of bedrooms or plumbing fixture units as proxies for wastewater demand Variable Rates Roughly 25% to 35% of California agencies have sewer rates that include a variable rate component. The variable rate component is typically, but not always, based on winter water use as a proxy for wastewater discharge since minimal outdoor irrigation occurs during the colder and wetter winter months. o Many of these agencies have rate structures that include both a fixed charge and a variable rate component. For example, the fixed charge may be designed to recover 60% of costs while the variable charge recovers 40% of costs. o Some agencies with variable rates subject the charges to a minimum and/or maximum charge. This is especially common for agencies with variable rates only. A minimum charge ensures that even customers with very low levels of water use pay at least a minimum amount towards the fixed costs of service. A maximum charge helps ensure that customers are not overbilled, such as due to water use for landscape irrigation that may occur during winter months. Commercial Sewer Rate Structures Fixed Rates Roughly half of California agencies levy fixed commercial sewer rates that do not vary based on changes in monthly water use. Agencies with fixed commercial rates use a wide range of approaches to reasonably estimate wastewater capacity needs, flow, and/or strength, to determine rates for different customer types or classes, such as: o Square footage of building area for different types of commercial uses o Number of plumbing fixture units o Fixed charge based on water meter size o Estimates of monthly water use and/or winter water use o Other factors such as average daily attendance (ADA) of students, number of seats in a restaurant, number of washing machines in a laundromat, etc. Variable Rates The other half of California agencies bill commercial accounts based on metered water consumption. These charges are typically based on all monthly use throughout the year, but a small number of agencies only bill based solely on winter water use. These agencies sometimes have rates that include both a fixed and variable rate component. Some of these agencies have numerous customer classes that apply to specific types of businesses (e.g. restaurant, retail store, professional office, auto service station, etc.) while others have a relatively small number of generic customer classes based on wastewater strength (e.g. low strength, moderate strength, mod high strength, high strength, etc.) 21

25 Fixed & Variable Rates Bartle Wells Associates believes agencies may legitimately use a wide range of rate structures to recover costs, provided reasonable justification can demonstrate that rates reasonably reflect the cost of providing service. Fixed and variable rate structures can both be appropriate and equitable methods for cost recovery. Fixed sewer rates are widely used throughout California and can reasonably reflect that most of the costs of providing wastewater service often in excess of 90% are fixed costs that do not vary with changes in the volume of wastewater flow. For example, most of the costs of operating, maintaining, and administering a wastewater system need to be incurred so the system is ready to serve customers and able to meet regulatory requirements at all times, regardless of the actual volume of wastewater discharged by a given customer each month. From this perspective, most of the costs for serving a single family home, for example, are the same for all homes regardless of differences in wastewater flow. An agency still needs to incur most of its costs even if the customer discharges no wastewater. This does not imply that all costs should be equally divided by all accounts. Rather it implies that fixed charges can equitably reflect the cost of service provided the costs are reasonably allocated to customers based on factors such as their proportional share of wastewater system capacity needs, estimated flow, and/or estimated wastewater strength. Variable charges can also be an equitable method of cost recovery. Even though a high percentage of expenses may be fixed costs, many agencies may find it fair and appropriate to recover these costs based on actual system usage. For example, although costs for staffing, overhead, and debt service may be fixed costs, it can be appropriate to apportion these costs to customers based on their proportionate share of wastewater flow and/or strength. What is important is not whether an expense is fixed or variable, but whether the method of revenue recovery for that expense is reasonably equitable. Ultimately, there is no single correct approach to rate setting. Bartle Wells Associates believes agencies have the policy flexibility to implement a wide range of rate structures. Potential Sewer Rate Structure Alternatives Based on analysis conducted in our prior studies in 2013 and 2014, prior input received from the City, and review of updated information, BWA does not recommend additional modifications to the City s sewer rate structure at this time. While BWA does not see a compelling reason to change rate structures, BWA understands that the City may want to re evaluate its residential sewer rate alternatives. This section discusses a few residential rate structure alternatives for City consideration. All the alternatives are widelyused approaches for recovering sewer service charges from residential customers. 22