Cotati City Council
Agenda Staff Report
Item type: REGULAR AGENDA (ACTION)
To: City Council
Subject: REVIEW PROPOSED SONOMA WATER TRANSMISSION
SYSTEM BUDGET FOR FISCAL YEAR 2025-2026 AND
PROVIDE DIRECTION TO CITY'S WATER ADVISORY
COMMITTEE MEMBER
Date: March 11, 2025
Written by: Craig Scott, Director of Public Works/City Engineer Recommendation
It is recommended the City Council adopt a motion providing direction to the City’s Water Advisory Committee Member to endorse the proposed Sonoma Water Fiscal Year 2025-2026 Water Transmission System Budget
Background
Sonoma Water has a Technical Advisory Committee (TAC) comprised of staff from the prime water contractors (specific cities and water districts that purchase water from Sonoma Water, as named in the Restructured Agreement for Water Supply), and a Water Advisory Committee (WAC) comprised of designated elected officials from these same prime water contractors.
At the TAC meeting on March 3, 2025, Sonoma Water presented the attached proposed budget for the TAC consideration and recommendation to the WAC. The TAC unanimously approved the proposed budget. At the prior joint WAC/TAC meeting on February 3, 2025, the WAC Chair set April 7, 2025, as the special meeting date to have the WAC vote on the proposed FY 25/26 Water Agency water transmission system budget.
Analysis/Discussion
The proposed Budget package prepared by Sonoma Water is attached and contains a summary, table of contents and budget detail sheet. In January, the Technical Advisory Committee (TAC) formed a Budget Subcommittee, and the Committee met with Sonoma Water staff over the past six weeks to review the proposed budget. The Committee met several times and sent questions to Sonoma Water Staff. These questions were responded to and helped guide several iterations of the proposed Budget package. Questions addressed topics including ensuring costs for work on the Potter Valley Project are not included in the rates, requesting a list of projects specifically planned for each aqueduct, potential of extending bond terms to lower impact on rates, the status of active capital projects, and the status of on-going studies including the Regional resiliency Study. A summary of the changes made from the initial January 17, 2025, draft, are on page iv of the attached Budget package.
The Committee’s intent was to seek transparency in the budget process and ensure drivers of the rates are not overstated. For example, Capital Project budgets have been consistently overstated as not all the projects are initiated or advanced according to the budget’s schedule. This year, as with prior years, Sonoma Water scaled back its capital program to reflect more realistic delivery schedules, resulting in a significant reduction in the proposed rate. The Committee’s understanding is that critical projects are not postponed as a result of it’s inquiries into the budget. Rather, any adjustments are a result of a more in-depth review of the practicality of delivering these projects in a given timeframe.
In accordance with the Restructured Agreement for Water Supply (the wholesale water supply agreement for the prime water contractors, including Cotati), the City’s wholesale water rate is tied to the Petaluma Aqueduct rate. The proposed overall increase to the wholesale water rate for FY 25/26 is 10.76 percent. Based on the Restructured Agreement for Water Supply, the rates are to be based on the lower of the prior 12-month average or 3-year average (44,530 or 42,407 Acre-Feet, respectively). The projected water deliveries for use in the FY25/26 budget, therefore, is the 3-Year average of 42,407.
The water rate is comprised of four groupings of charges as follows: 1) Operations and Maintenance, 2) Aqueduct Facilities Capital Charges, 3) Storage Facilities Capital Charge, and 4) Common Facilities Capital Charge. Page 7 of the attached budget shows the proposed water rate for the aqueducts and broken down by these groups. The rate groupings are each described below.
Operations and Maintenance
This charge consists of a base O&M charge and four sub-charges that together make up the “Total O&M Charge”. The base O&M charge would increase by $13.77/AF (1.4%) due to cost for maintenance equipment, equipment rentals and leases, SCADA system contributions, utilities, staff labor costs tied to negotiated labor agreements, and other expenditure increases offset by decreases in contract services. Operating Transfers increased due to the increase in Petaluma Aqueduct Capital Charges. A summary of the O&M fund changes for FY25/26 compared to the FY24/25 adopted budget is shown on page vi, and changes to the O&M rate, revenues and expenditures are shown on pages xii and xiii of the attached documents.
The four sub-funds within the Total O&M Charge are as follows:
1. Water Management Planning. This sub-fund increases by $4.22/AF. This sub-charge is used primarily to fund the Urban Water Management Plan and the annual water supply and demand assessment. The plan is required by the State for years ending in zero and five. The increase is due to work needed to prepare and submit the 2025 Urban Water Management Plan and offset by the existing fund balance of $156,000.
2. Watershed Planning/Restoration. This sub-charge is used primarily to fund activities required for the implementation of the Biological Opinion. This sub-charge would increase by $5.66/AF (14.1%) which is on top of an 11% increase in FY24/25. The rate increase is primarily a result of costs associated with maintenance of Dry Creek Phases 4 and 5, RRIFR Estuary Management & Monitoring, the new Biological Opinion, and fire fuel reduction offset by the increased use of fund balance.
3. Recycled Water & Local Supply. This sub-charge is used primarily for funding recycled water and local supply projects. Fiscal Year 2025/26 rate is increased from zero to $0.14/AF for depreciation. Expenditures were decreased due to Sonoma Water’s share of Groundwater Sustainability Agency mandatory fees moving to the Agency Operating Fund.
4. Water Conservation. This sub-charge is used for funding regional water conservation efforts, such as regional media ads and supporting the regional Sonoma-Marin Water Saving Partnership. This sub-charge is to increase by $4.29/AF (7.2%) following a 10.2% increase the prior year. The rate increase is primarily due to not being able to use as much fund balance to offset rates as was used in prior two years.
Summaries of the major expenses in each of these sub-funds can be found on pages xiii through xv of the attached Proposed Sonoma Water FY 25/26 Transmission System Budget.
Aqueduct Facilities Capital Charge
A discretionary charge is added by the water Contractors to build fund balance for future aqueduct capital projects and to provide rate stabilization. The Contractors on the Petaluma Aqueduct, Cotati, Rohnert Park and Petaluma, decided the past two years to use the fund to stabilize rates and the funding rate is zero. This year, the Contractors decided to reinstate the charge at $10/AF.
Storage Facilities Capital Charge
FY25/26 rate is $31.5 and is to increase by $18.6/AF (59.2%). The rate is calculated by dividing the annual debt service and reserve requirements by water deliveries. Total Debt service is higher than previous year due to issuance of 2025 Bonds for capital projects in the Storage Fund and decrease in budgeted water deliveries. The debt was to fund the construction of new storage tanks. Sonoma Water does not consider tank remediation (i.e. recoating, seismic retrofits, cathodic protection systems) as capital projects so these are paid for out of the O&M fund and not the Capital fund.
Common Facilities Capital Charge
The rate increase is $65.1/AF or 49.6%. The rate is calculated by dividing the annual debt service and reserve requirements by water deliveries. The total debt service is higher than the previous year due to issuance of 2025 Bonds for capital projects in the Common Fund and a decrease in budgeted water deliveries.
Petaluma Aqueduct Bond/Loan Charge
This is a new charge of $15.7/AF to Cotati, Rohnert Park and Petaluma. Petaluma Aqueduct pays an additional revenue bond charge for the bonds associated with Ely BPS Flood Control and Electrical Upgrade and Wilfred Booster Station Projects. Reduced Aqueduct Capital Charge and use of Fund Balance in prior years results in total Debt service and rate increase that are higher in FY 2025/26 as Petaluma Aqueduct will be bonding for the first time with the 2025 Revenue Bond Issuance.
Financial Considerations
Approval of the budget is expected to result in an increase of 10.76 percent to the wholesale rate of water that the City purchases from Sonoma Water. Purchases from Sonoma Water account for 30.5 percent of the City’s total water operating expenses. This is following a10 percent rate increase last year. The City’s 5-Year rate model includes a 5.5 percent increase for the years 2024, 2025, and 2026. However, due in part to Sonoma Water increases significantly exceeding projected increases used in the City’s rate model, the City has updated its rate analysis and is including rate adjustments in line with Sonoma Water’s proposed increase.
Cotati, Rohnert Park and Petaluma TAC representatives all agreed to add the discretionary Capital Charge back into their rate at $10/AF which adds 0.78 percent to the rate.
this year and the prior two years averaging about 10 percent are a deviation from the prior 12 years where rates of increase varied between 3.5 and 6.9%.
A slide of the attached power point, shows a chart comparing the proposed Sonoma Water rate increase to other wholesale water agencies. Even with the proposed rate increase, Sonoma Water’s rate remains well below those of other wholesale water agencies. It is important to note, however, other agencies have complex treatment plants and other factors which make the system's costs not fully comparable.
As with the City’s financial planning, the Sonoma Water long range financial model’s goal is to provide long term rate stability while preparing for long range capital projects. The goal is to build up capacity for future projects, while avoiding large year-over-year rate increases.
Environmental Issues
Council action on this item is exempt from the California Environmental Quality Act (CEQA) because it does not constitute a project as defined by CEQA Guidelines Section 15378.