City of Signal Hill 2175 Cherry Avenue Signal Hill, CA 90755-3799 AGENDA ITEM TO: FROM: SUBJECT: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL BARBARA MUÑOZ DIRECTOR OF PUBLIC WORKS RESOLUTION DECLARING INTENTION TO AMEND SIGNAL HILL MUNICIPAL CODE SECTION 13.04.130, ESTABLISHING RATES FOR WATER DELIVERED THROUGH THE CITY S DISTRIBUTION SYSTEM Summary: Staff is recommending a 5% water rate increase for this fiscal year and next fiscal year. The proposed water rate adjustments are needed to compensate for increased operating costs and to replenish the water depreciation reserve to fund improvement projects. City staff prepared a Water Utility Rate report to present the costs of providing water service to the community and the revenues necessary to support this service. The resolution declares City Council's intention to amend Signal Hill Municipal Code Section 13.04.130. Recommendation: 1. Waive further reading and adopt the following resolution, entitled: A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SIGNAL HILL, CALIFORNIA, DECLARING ITS INTENTION TO AMEND SIGNAL HILL MUNICIPAL CODE SECTION 13.04.130 ESTABLISHING RATES FOR WATER DELIVERED THROUGH THE CITY S DISTRIBUTION SYSTEM 2. Set the Public Hearing for October 28, 2008.
Page 2 Fiscal Impact: A 5% water rate increase will generate an additional $243,215 in revenue over the next year and a half. The water rate adjustments will help offset the cost of purchasing and delivering water to the community and will begin to replenish the Water Depreciation reserve to pay for needed capital improvement projects. The proposed FY 2008-09 and FY2009-10 Water Fund Projection of revenue and expense are shown below. Background: FY 2008-09 Revenue and Operating Expense Forecast Revenues $3,527,798 Expenses $2,699,100 Difference between Revenue/Expense $ 828,698 FY 2009-10 Revenue and Operating Expense Forecast Revenues $3,680,945 Expenses $2,796,227 Difference between Revenue/Expense $ 884,718 The City of Signal Hill provides potable water and customer service to over 2,900 residential, commercial, and industrial water accounts. Water is distributed to the community through approximately 50 miles of various size pipelines. The water system consists of two active groundwater extraction wells, one water treatment and filtration plant, three reservoir storage facilities, and three pump stations. The main source of water supply for the City is groundwater. However, the City also maintains a connection to the Metropolitan Water District for supplemental water, when needed. City staff is proposing 5% water rate adjustments, for FY2008-09 and FY2009-10, to cover the increasing costs of operating a water utility and to replenish the water depreciation reserve to pay for capital improvement projects. Increases in operating costs such as water supply costs, energy costs, and the costs associated with water treatment and water quality have generated a need for additional annual revenues. Further contributions are needed for the depreciation reserve to replenish the drawdown of funds, over $1.4 million, for the Gundry Reservoir Roof Replacement Project and the rehabilitation of Wells # 7 and #8. Furthermore, future capital improvement projects such as Well # 9 project will further drawdown the depreciation reserve. A Water Utility Rate report was prepared to present the costs of providing water service to the community and the revenues necessary to support this service. The core costs of providing water to the community are rising at a rate faster than inflation. The total rate increase over the past 10 years is 16%, which is far below the CPI of 37% for that same period of time.
Page 3 Analysis: The water utility is intended to be a self-supported enterprise. The projected Water Fund cash balance for FY2008-09 is $1.2 and $1.0 million for FY2009-10. With the recommended 5% rate increase this fiscal year and next fiscal year, the additional revenues will help offset the increase in operating costs and limit the gradual decrease in our cash reserves. Forthcoming capital improvement projects may require the City to revisit the water rate structure in the future and at the same time correct the declining cash reserve. The City s water utility includes three programs: Water Operations; Water Customer Service; and Water Debt Service. The combined anticipated expenses for these programs are over $3.866 million for FY2008-09 and $3.914 million for FY 2009-10. Increases in operating costs such as water supply costs, energy costs, and the costs associated with water treatment and water quality are described below. Water Supply Costs The City s water supply is provided through two sources: groundwater pumped by two City owned groundwater extraction wells, and imported water purchased from the Metropolitan Water District (MWD). The main source of water supply for the City is groundwater. The City has groundwater extraction rights in the amount of 2,022 acre-feet. The City anticipates the overall water demand for this fiscal year will be approximately 2,200 acrefeet, leaving a shortfall of 178 acre-feet. The City will closely monitor the water lease market should excess water become available in the Central Basin, or purchase the additional water needed from MWD. The Water Replenishment District charges a replenishment assessment for each acre-foot of water the City extracts from the ground water basin. The Water Replenishment District has raised its replenishment assessment from $138 per acre-foot to $153 per acre-foot, reflecting an 11% increase since 2006. The City is anticipating the needed rate increases from 3% to 5% from the Water Replenishment District each year, for the next five years. Water is purchased from MWD, as needed, to supplement the City s groundwater supply to meet the high water demand months of July through September. On average, the City purchases 206 acre-feet of imported water per year. In July 2008, MWD implemented a 7% rate increase and scheduled a 12.5% increase in January 2009. MWD is also proposing a 15% increase for January 2010. Operational Costs Operational costs represent the expenses associated with the daily operation of the water system, including utilities, contract services, water treatment chemicals, general supplies, and materials needed for the construction, maintenance and repair of the public water system. The projected operational costs for FY 2008-09 are $1,493,800 and for FY 2009-10 these costs are estimated at $1,553,600. With an estimated actual operational cost of $1.308 million for FY 2007-08, the increase for FY2008-09 is about 14%.
Page 4 Southern California Edison has advised the City to anticipate an energy cost increase of at least 20% over the next two years. The groundwater extraction wells and booster pump stations use electricity as the primary source of power. The energy required to pump water from the water basin and deliver it to the City s reservoirs is the major cost. Although the Water Division pumps in the off-peak hours when rates are lowest, the City is still expecting higher electricity costs because of the rate hikes. A significant contract service expense is the Water Division s water quality analysis costs. Since 2006, the Water Division has experienced an increase in the range of 180%, with an estimated total cost of $41,000 for FY 2008-09. This increase is two-fold: an overall increase in laboratory analysis costs per sample, as well as regulatory changes requiring an increase in frequency of tests and type of samples. As water quality regulations continue to be more stringent, laboratory analysis costs will continue to rise. The Water Division has also experienced a significant increase in chemical costs associated with our water treatment processes. Salt and electricity are the two primary elements used for chlorine generation. The Water Division s annual salt costs have increased 68% since 2006. Ammonium hydroxide and ferric chloride are also used as part of our water treatment processes. These costs have also increased 60% and 31%, respectively. Operational costs also include the estimated charges for contract services used in the routine maintenance or emergency repair of the water system. The water system repair and replacement costs have soared over the past two years. Two primary examples are the cost of copper pipe used for water service lines, which has increased 66% since 2006 and the cost of fire hydrants, which has increased 136%, from $929 in 2006, to the current cost of $2,200. To ensure the reliability of the water system, on-going maintenance and/or replacement of aging and worn equipment and pipelines must be performed. An example of such a project is the replacement of the chlorine generation equipment located at the Gundry Reservoir and Booster Pump Station. This piece of equipment is an essential part of our water treatment process and is antiquated and in need of replacement. A mid-year budget request will be needed to cover this projected cost. The estimated cost for a new chlorine generator is $150,000. The cost to keep the water system in good working order is expensive as demonstrated by the annual replacement cost of all water program fixed assets also known as depreciation. The depreciation value for FY 2008-09 is $770,000. Capital Improvements A study of the water distribution system completed in 2005 estimates that the City would need to spend approximately $4 million over the next 10 years to upgrade the water distribution system to meet future demand. A need to complete a comprehensive Master Plan to include the pumping and treatment facilities may be brought forward in the near future. Some of the operating equipment is over 40 years old and will need to be replaced in the near future. The current water rate structure does not adequately cover the long term capital improvement costs.
Page 5 Over the past few years, the City has been very fortunate to have development impact fees help offset and bridge the gap for capital improvement expenditures. Since 2006, the City has spent about $900,000 of impact fees for drilling Well #9. The current estimated cost to complete Well # 9, which is to install the pumping and treatment equipment is estimated to be approximately $2.0 million. Staff will be completing plans for Well #9 this year and applying for grants to construct the pumps and treatment facilities. In the current economic downturn, the City can no longer expect to receive the significant development impact fees in comparison to the early 2000s due to the General Plan s reduced growth projections in the next decade, and other factors. The majority of the water system replacement costs will be funded through the Water Depreciation Reserve that is currently under-funded. The Gundry Reservoir Roof Replacement Project and the rehabilitation of Well # 7 and # 8 caused the reduction to the Depreciation Reserve. Adding to this problem is the rising level of construction costs. Therefore, to adequately fund future capital improvement projects, further contributions are needed for the Depreciation Reserve. Much of the future capital improvements are the replacement of existing facilities and not related to new development. Debt Service In 1996, the City Council authorized $10,000,000 in Water Certificates of Participation (bonds) to finance the design and construction of the Hilltop and Temple Reservoir facilities and associated pipeline improvements. In 2006, the City issued $8,985,000 Water Revenue Refunding Bonds to refund the outstanding 1996 Certificates of Participation bonds. This refunding resulted in decreased debt service payments by approximately $35,000 per year. The 2006 bonds will be repaid from revenues derived from water sales to customers, as well as impact and connection fees. Debt Service (interest payments) for FY 2008-09 is $397,200 and $348,226 for FY 2009-10. The water bond debt service coverage is adequate, based upon the requirements of the bond indenture agreement. Water Fund Cash Reserve Policy The City s Cash Reserve Policy provides for the following: Working cash - about three months of expenses or about $955,474 excluding capital expenditures. A depreciation reserve set at 5% of book value to fund the replacement of current plant and equipment. Currently, the Water Fund has a book value of approximately $25.5 million. This would require a reserve of $1.275 million. The Water Fund currently has a reserve of $2,224,294. We have been funding our reserve at $150,000 per year, but increasing to $350,000 starting in FY08-09 to accumulate funds for improvement projects. Next year, the reserve will reach $2,274,294. However, because of planned capital projects, the City will have to make withdrawals from the reserve. Those withdrawals are estimated at $510,000 in FY 08-09, and $300,000 per year thereafter.
Page 6 The Cash Reserve Policy requires a reserve totaling $2,230,474. Currently, the Water Fund has a cash balance totaling $993,155 at year end FY 2008. The difference of $1,237,319 will be funded over the next several years. The Water Fund needs to adequately fund its operating reserve. For that reason, further contributions are needed for the Depreciation Reserve. The Gundry Reservoir Roof Replacement Project and the rehabilitation of Well # 7 and # 8 caused the reduction to the Depreciation Reserve. As a result of the bond refunding, the City is only able to partially replenish the Depreciation Reserve from the Rate Stabilization Reserve. In addition, future capital improvement projects such as the Well # 9 project will further drawdown the Depreciation Reserve. Water Rate Adjustment City staff conducted a benchmark survey to ascertain the anticipated water rate increases of neighboring cities for FY 2008-09 and based on the information found, the recommended increase is lower than most benchmark water providers. For example, the Cities of Long Beach and Norwalk are seeking a 15% increase, the City of Lakewood is considering a 7% increase and the City of Paramount increased water rates by 5%. Water rates are based on the actual costs associated with operating a water utility. A 5% rate increase is being recommended this year and next fiscal year 2009-10. The Water Division anticipates further significant increases in energy and water supply costs over the next two years, and therefore, the water rates will require another evaluation during FY 2009-10 to determine if additional increases are necessary. The proposed 5% rate adjustments will help offset the cost of purchasing and delivering water to the community. The typical single-family home or condominium in Signal Hill will see a monthly increase of $1.35, based on a monthly usage of 1,500 cubic feet of water. Prop 218 and Required Ballot Proceedings In November 1996, California voters approved Proposition 218, which amended the California Constitution and requires local governments to have a vote of the affected property owners for any proposed new or increased assessment before it could be levied by the governing body. In July 2006, the California Supreme Court issued a decision in the Bighorn-Desert View Water Agency v. Verjil case and determined that water service charges are property related fees and thus subject to the procedural requirements of Proposition 218. These procedural provisions require detailed noticing of each property owner 45 days prior to the hearing on the fee and prohibit the adoption of the fee or increase if a majority of the property owners protest the imposition or increase in writing. Furthermore, the substantive requirements of Prop 218 provide that the amount of the fee shall not exceed the proportional cost of the service attributable to the parcel, and that revenues from the fee shall not exceed the funds required to provide the service and shall not be used for any purpose other than that for which the fee was imposed. The Public Works and Finance Departments prepared the Water Utility Rate Report, which identifies the estimated budgets for fiscal years 2008-09 and 2009-10. The report was prepared to present the costs of providing water service to the community and the revenues necessary to support this service. The Water Utility Rate Report adheres to the
Page 7 substantive requirements under Prop 218 and illustrates that the revenues generated do not exceed the proportional cost of the service being provided. The proposed water rate increase indicated in the Water Rate Utility Report is subject to Prop 218 provisions and thus requires a ballot proceeding which is explained below. The ballots are counted by total number of protests received (one vote per parcel). If the total number of protests received exceeds a simple majority of the number of parcels, the City Council may not enact the water rate increases. The process and timeline is as follows: 1. If the City Council authorizes Public Works to continue with the ballot proceedings, the ballots would be mailed no later than Thursday, September 11, 2008 to the record property owner and owner address. The legal requirement is that ballots be mailed out at least 45 days ahead of the Public Hearing, which is when the ballots are due. 2. Public Works recommends that the Public Hearing be set for October 28, 2008. Ballots would be received and held in custody of the City Clerk until released upon direction of the City Council at the close of the Public Hearing. 3. On October 28, 2008, the City Council would hold a Public Hearing and order the ballots opened and counted by the City Clerk. The results of the ballot measure would be revealed by the City Council to the public. The City Council must allow for a protest by the public, if any. If a major protest vote does not exist, the City Council would need to consider approving the resolution amending the municipal code to establish the new water rates. If a majority protest was successful, the City Council would need to consider a revised Water Utility Rate Report with a revised resolution. This report and resolution would be brought back to the City Council at a later date. It is recommended that the City Council adopt a resolution declaring its intention to provide for a balloting measure for property owner consideration of increased water rates, and setting a time and place for a Public Hearing for Water Utility Rate Adjustments. The attached resolution declares Council's intent to amend Signal Hill Municipal Code Section 13.04.130, establishing rates for water delivered through the City s distribution system. The public hearing will be held on October 28, 2008. Reviewed: Maida Alcantara Approved: Kenneth C. Farfsing Attachments
RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SIGNAL HILL, CALIFORNIA, DECLARING ITS INTENTION TO AMEND MUNICIPAL CODE SECTION 13.04.130 ESTABLISHING RATES FOR WATER DELIVERED THROUGH THE CITY S DISTRIBUTION SYSTEM WHEREAS, the City of Signal Hill has a Water Department that provides water to all residents and businesses; and WHEREAS, the City has undertaken major improvements to the water system requiring long-term financing methods which will fairly distribute the cost to present and future customers; and WHEREAS the City s Water Department s operational costs, which represent the expenses associated with the daily operation of the water system, such as utilities, contract services, water treatment chemicals, and general supplies and materials needed for the maintenance and repair of the City s water system, are estimated to increase significantly; and WHEREAS, the schedule of water rates currently established for the subscribers of water through the water system of the City of Signal Hill, contained in Ordinance No. 2006-11-1366 is not adequate to meet the increased operating costs associated with the delivery of water to its customers without incurring operating deficits; and WHEREAS, the City s Water Department conducted a benchmark survey to ascertain the anticipated water rate increases of neighboring cities for FY2008-09, and based on the information found, the Water Department is recommending a lower percentage water rate increase in comparison to those benchmark water providers; and NOW, THEREFORE BE IT RESOLVED, that the City Council of the City of Signal Hill, California, does find, determine, and declare, as follows:
Section 1. The City Council receives the 2008 Water Utility Rate Report for public comment and proposes to hold a public hearing majority protest vote, according to the requirements of Proposition 218, on the proposed rate structures of the Report. PASSED, APPROVED, AND ADOPTED at a regular meeting of the City Council, of the City of Signal Hill, California, this 9 th day of September 2008. ATTEST: MICHAEL J. NOLL MAYOR KATHLEEN L. PACHECO CITY CLERK STATE OF CALIFORNIA ) COUNTY OF LOS ANGELES ) ss. CITY OF SIGNAL HILL ) I, KATHLEEN L. PACHECO, City Clerk of the City of Signal Hill, California, hereby certify that Resolution No. was adopted by the City Council of the City of Signal Hill at a regular meeting held on the 9 th day of September 2008, and that the same was adopted by the following vote: AYES: NOES: ABSENT: ABSTAIN: KATHLEEN L. PACHECO CITY CLERK