Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: ADOPTION OF RESOLUTION ACCEPTING THE DRAFT
WATER AND SEWER RATE STUDY AND DIRECTING STAFF
TO PROCEED WITH THE PROPOSITION 218 PUBLIC
NOTICING PROCESS FOR PROPOSED WATER AND SEWER
RATE ADJUSTMENTS AND TO SET A DATE FOR THE
PUBLIC HEARING AND THE ADOPTION OF RATES
Date: February 25, 2025
Written by: Craig Scott, Director of Public Works/City Engineer Recommendation
It is recommended the City Council of the City of Cotati adopt a Resolution accepting the Draft Water and Sewer Rate Study and directing staff to proceed with the Proposition 218 public noticing process for the proposed water and sewer rate adjustments and to set a date for the Public Hearing and Adoption of the Rates.
Background
The City operates water and sewer utilities and provides these services for City residents, businesses and public facilities. The City periodically updates its water and sewer rate study to ensure the rates are sufficient to meet operating and maintenance costs. The rate study describes the analysis performed, presents the financial plans for the utilities, provides the basis and rationale for rate calculations, and summarizes findings and recommendations regarding the water and sewer rates. It is industry practice to update rate studies every 2-3 years to account for changes in revenues and/or expenses. The current 5-year rate program is based on a rate study completed in May 2022, and June 2025 will be the 4th year for the program. Revenues and expenses for both utilities have changed sufficiently to warrant revisiting the Rate Study to ensure operating and capital costs can be met.
Analysis/Discussion
On May 22, 2024, the City executed an agreement with Hildebrand Consulting to update the ten- year water and sewer system financial plans to reflect current financial information and new financial projections, and establish a new five-year water and sewer rate programs extending from Fiscal Year 2026 through Fiscal Year 2030.
The Draft Water and Sewer Rate Study was completed and is attached to the resolution accompanying this Staff Report. The Study presents each utility’s financial and service obligations for ongoing operation and maintenance, debt service, and capital improvements while maintaining prudent reserves. The Study has been completed concurrently and in coordination with the City’s Fiscal Year 2025/26 and 2026/27 budget for the “Enterprise” (aka Utility) funds. The Study goes further and presents projected expenses, including capital projects, for a ten-year period. The Capital project list in the Study draws from the respective utility master plans with the timing of the planned improvements revised to reflect the need to address deferred maintenance and implement improvements to correct existing and projected future capacity deficiencies.
The sewer capital project need is being driven at present by the results of recent studies evaluating the condition of the City’s sewer pipelines and projects to reduce infiltration and inflow of groundwater and stormwater. If methodically addressed, the City can space these projects over the next 10 years. Additionally, the City’s capital plan includes projects to renew and remediate aging sewer lift stations and improve reliability with the installation of fixed backup power systems.
The water capital project need is primarily providing for storage to address operating and emergency criteria, and to renew and remediate the City’s three aging groundwater wells. The water capital plan also includes pipelines to improve fire flow capacity.
The Study recommends water and sewer rate adjustments over 5 years as described in the Draft Rate Study. The increased expenses, reduced revenue, and increased capital needs have put pressure on rates. Efforts to moderate the rate adjustments include spreading out capital costs as much as deemed prudent and debt financing the water storage tank and fire capacity pipeline projects.
Utility Rate Revision Process
Following the Study’s acceptance by the City Council, staff will begin the required Proposition 218 public noticing process. Proposition 218 requires the City to hold a public hearing on the proposed rate structures to allow for public comment on the proposed rate increases and to provide written notice to each property owner at least 45 days in advance of the hearing. A draft of the required Proposition 218 notice is attached hereto, and the City Attorney’s office will review the final version before issuance.
Once the public hearing has been conducted, the City Council will consider a rate resolution to adopt the proposed rate structures. It may adopt rate adjustments that are equal to or less than the rates presented in the accepted rate study provided that there is no majority protest.
Financial Considerations
The Water and Sewer Rate Study Update shows a combination of expenses exceeding and revenues falling below the prior Study’s (2022) assumptions, holding to the prior rate schedule would not be sufficient to implement the water or sewer capital programs. The updated Study provides for adjusting the programmed rates higher and debt financing the capital program to meet the cash flow requirements with the near-term spike in capital spending. After the final recommended increase in FY 2029/30, it is anticipated the rate revenue increases will need to continue to allow the Water Enterprise to cash-finance its capital program rather than seek internal and external loans.
The forecasted capital spending is materially different from the capital spending that was forecasted by the 2022 Rate Study. The spending currently forecasted to occur between FY 2024/25 through FY 2031/32 is $4.2 million whereas the 2022 rate Study forecasted the spending would only be $2.1 million during the same period. This increase in annual capital spending is the primary driver for the proposed increase in sewer rates. These capital projects are proposed to be paid with cash since there is no spike in spending, rather, the increase in capital spending represent a new normal which is more appropriate to fund with cash.
Environmental Issues
The action of approving the Rate Study and initiating the Proposition 218 process does not constitute a project as defined by California Environmental Quality Act Guidelines Section 15378; therefore, no further environmental review is required.