Budget Assumptions for FY 2013/14 and the 10 Year Forecast

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1 Budget Assumptions for FY /14 and the 10 Year Forecast Staff has begun the process for preparation of the FY /14 operating and capital budget, as well as year end projections for the current fiscal year. While no definite projections have been made at this time, some general guidance has been developed for budget preparation: Service Levels No increase in service levels in FY /14; increased recycled water delivery starting FY 2014/15 Plant Operations: In FY 2012/13, the District began operations of the FOG Receiving Station. There are no anticipated changes in service levels until after the Recycled Water Phase 1 facilities are constructed (FY 2014/15), at which point the plant will be able to provide additional recycled water, with increased flexibility to provide that water during the wet weather season. The FY 2014/15 budget forecast should include operational expenses associated with the increased delivery of recycled water. Collections, Reclamation, Administration, Engineering, Pollution Prevention: No change in service levels is included in the 10 year forecast. Revenues Sewer Service Charges/CPI Changes increase 3.2% (estimate) for FY /14, 2.2% per year thereafter The sewer service rate is scheduled to increase based on the December 2012 SF area CPI for urban consumers, compared to the prior year December. That number will not be known until the third week of January. To provide context, the most current CPI number is from October, with an increase of 3.2%. There is no reason to believe that the CPI increase in December will be significantly different. The intention is to present a budget to the Board that assumes the December to December CPI increase as the sewer service charge rate increase. For future years in the 10 year plan, the sewer service rate will be projected to increase 2.2% annually. This is the average CPI increase over the past 10 years, but is likely to be conservative as the economy improves: 4% 3% 2% 1% CPI

2 Growth in EDU development of 250 EDU in FY /14, and 290 per year thereafter. Fiscal year /12 and FY 2012/13 have seen increases in capacity charges over the prior two fiscal years, indicating that the local economy is starting to rebound. Year end estimate for FY 2012/13 is 250 EDU. It is recommended that the /14 fiscal year assume the same level of economic development, 250 EDU, to be purchased as the new rate of $8,300 per EDU FY02 FY04 Historical EDU FY06 For the 10 year forecast, it is assumed that EDU growth will increase to 290 EDU per year, or 0.75% annual growth rate, which is comparable to the city and county growth management plans. Construction CPI 3.0 % next year and 3.6% per year in future years. The Engineering News Record s Construction Cost Index (ENR CCI) is used by the District for future increases to the capacity charge rate, as it represents the inflation of construction costs. For the FY /14, that rate was set in prior rate setting decisions to increase to $8,300 per EDU. In future years, that rate is scheduled to increase by the annual change in the ENR CCI index (February to February). The average annual increase for the past 10 years is 3.6%. It is assumed in the 10 year plan that the construction CPI will increase by 3. next year, and by 3.6% annually thereafter. 8. ENR CCI Interest Earnings 0.5% for the next three years, then increasing to 2. by the end of the 10 year forecast. The Federal Reserve recently announced that it will keep the Federal Funds rate between and 0.25% until unemployment is below 6.5%. According to analysis by The Hamilton Project,

3 if monthly employment numbers average 250,000 new jobs per month (last 12 month average was 220,000 per month), it will take until for the unemployment rate to reach 6.5% Based on the assumption that the Federal Funds rate will remain low until, the FY /14 through /16 fiscal years will assume an interest earnings rate of 0.5% (the current earnings rate), with a gradual increase in 2016/17 through the end of the 10 year forecast. 1.25% % % 0.0 Interest Earnings Lease Revenue Contractual increases for Eagle Vines and Sprint. No additional revenue from HCV Napa for FY /14. No assumption made for 10 year forecast. Lease rates for Eagle Vines and for Sprint are set by contract and increase with local CPI. The big unknown is whether HCV Napa will fulfill its requirements to pay the District $1,356,250 on July 1, as required by contract, and then continue to pay the District the annual lease payment of $600,000 for FY /14 and beyond. We have been informed by HCV Napa that they are having trouble with the financing of the project, but they are unwilling at this point to say whether they will be proceeding with the scheduled lease payments. Staff believes that it would be prudent at this point to develop a base budget for FY /14 that does not include the $1,356,250, nor the $600,000 lease payment for FY /14. Staff is seeking direction from the Finance Committee on whether leave revenue should be assumed for future years in the 10 year forecast. Policy Question: What assumptions should be used for leave revenue from HCV Napa for future years? Lease Revenue w / o HCV Lease Revenue w /HCV $800,000 $800,000 $600,000 $600,000 Waste Hauler Revenue Increase 28% in FY /14 for FOG revenue, then by CPI. Waste hauler revenue decreased as the economy slowed down (seen in ), and as one of our septic haulers stopped hauling to NSD in and now hauls to Vallejo. Starting in FY 2012/13, this revenue source will increase as the District begins to charge fees for FOG hauling. At current FOG hauling levels, it is expected that the District should receive an

4 additional $100,000 per year from FOG revenue. The FY 2012/13 year assumes base septage revenue equal to FY /12, plus an increase for CPI (same as sewer service charges CPI) and for 6 months of FOG revenue. FY /14 assumes CPI increase plus a full year of FOG revenue. Future years assume an increase in CPI, but not in gallons. $300,000 $100,000 Waste Hauler Revenue Recycled Water Revenue increase 3.2% for FY /14, and increases thereafter based on CPI and planned increases in recycled water usage. It is recommended that recycled water usage be forecasted based on average weather patterns. FY 2012/13, based on 2012 summer/fall numbers, will likely be an average year for recycled water usage. Usage is anticipated to remain stable for, with increases in for Stanly Ranch coming on line, and in for the MST area starting to take recycled water. From current year through, it is assumed that rates will increase by CPI. Starting in, rates will increase based on the rate study adopted by the Board. $1,200,000 $1,000,000 $800,000 $600,000 Recycled Water Expenditures Staffing Levels there will be no increases in the number of budgeted positions. There are no planned changes in service level for FY /14, and therefore no increases or decreases in staffing levels. Staffing levels for future years are assumed to remain at the currently approved 51 FTE, unless service level changes are recommended through the Strategic Planning process.

5 52 Approved FTE Salary Expenses Increase 3.6% for FY /14. In accordance with the labor MOUs, salaries are scheduled to increase in FY /14 by either CPI or 2%, whichever is higher, with an upper limit of 4.25%. The CPI used for this calculation is the SF CPI for urban wage earners and clerical workers for February, compared with the prior year. The October to October CPI, the most recent data available, increased by 3.6%. While fuel costs were higher in October than they currently are, it is unknown to what extent this change will have on the February numbers. It is likely that the number in February will not be significantly higher or lower than October s numbers. The ten year average for Wage Earner CPI is 2.6%, which is what s presented as forecast numbers for Budget development will assume 3.6% for salary increases for FY /14 for now, but will be adjusted to the actual increase once that number is known in March. Policy Question: The current MOUs expire on June 30, What assumptions should be used for salary expense increases, if any, for beyond this date in the 10 year forecast? 7% 6% 5% 4% 3% 2% 1% 2001 Wage Earner CPI Insurance Expenses 8% per year increases for health insurance, other insurance expenses at known costs. Health care benefit costs are known for the first six months of next fiscal year. The annual increase in costs in 2012 was 7.3%, while the annual increase in was 6.8%. The increase in will be 9.5%. For budget development purposes, staff recommends planning for an 8% increase in costs in calendar year Part of these costs increases will be offset by the continued decrease in "medical in lieu" payments negotiated as part of the labor contracts. Other insurance expenses are also know for the first part of next fiscal year change for dental insurance, 1.5% decrease for vision insurance, 8.5% increase ($1,000) in life insurance, change in long term and short term disability insurances, and 2.3% increase in the employee assistance program.

6 Health Insurance 12% 1 8% 6% 4% 2% Policy Question: Retirement Expenses 30.2% for FY /14, 32.3% thereafter. PERS has not yet provided the employer rate for FY /14 but did provide an estimate of 30.2% about a year ago. With the continued volatility in the investment market, it is likely that future years will continue to see increases in employer contributions to make up for a lack of growth in investments. An assumption of "current rate + 2%" is recommended for FY 2014/15 and beyond, as future forecasts of retirement expenses, for years beyond FY 13/14. What assumptions should be used for retirement expenses, particularly the employee paid portion, for future years beyond the expiration of the current MOU? 4 PERS Rates Policy Question: Services & Supplies No increase, expect for contracted and known increases. Staff will assume no increases in the services and supplies budget without additional analysis and justification. Exceptions will be made in certain cases where documented increases in District costs are known, such as cost increases in multi year chemical contracts. Capital Projects Continuation of the existing 10 year capital plan. Capital projects identified in prior year 10 year plan will be continued as scheduled. The District should be planning for the renewal or replacement of at least 1% of its sewer system in any given year, or about 2.7 miles of pipeline. The estimated cost for this is about $3 million per year. Should the capital plan use placeholders of $3 million per year in the 10 year forecast for these projects, pending a determination of the I&I Study and recommendations?