Cotati City Council
Agenda Staff Report
Item type: PUBLIC HEARINGS (ACTION)
To: City Council
Subject: CONSIDERATION TO ADOPT RESOLUTION APPROVING
UPDATED WATER AND SEWER RATES AND SUPERSEDING
EXISTING RATES
Date: May 27, 2025
Written by: Craig Scott, Director of Public Works/City Engineer Recommendation
It is recommended the City Council of the City of Cotati conduct a public hearing on proposed water and sewer rates, and, if no majority protest occurs, then adopt a Resolution approving the proposed rates and superseding the existing 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 changing expenses. The current 5-year rate program is based on a rate study completed in May 2022. The third of five programed rate adjustments occurred last year. Given the changes in operational costs and revenues from the original assumptions, it is now time to update the rate study and establish a new 5-year rate program.
Analysis/Discussion
On May 22, 2024, the City executed an agreement with Hildebrand Consulting to prepare tenyear water and sewer system financial plans and five-year water and sewer rate programs. The Draft Water and Sewer Rate Study (Study) was completed and, on February 25, 2025, City Council accepted the Draft Water and Sewer Rate Study, and set the Public Hearing date of May 27, 2025, to receive public comment and consider adopting the Study.
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 Years 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 reduced demands and slower growth than what was projected in the master plans and to moderate their impact on rates where allowable.
From FY2022/23 to FY2023/24, the City has spent on average about $740 thousand per year for capital projects to rehabilitate or improve the sewer system. The forecasted average from FY2024/25 through FY2034/35 is $606 thousand per year. There is an initial period from FY2025 through FY2029 where spending is limited to ensure the sewer fund balance does not drop below the minimum reserve target. The sewer capital project need is being driven 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, to install backup generators at three of the City’s four Lift Stations, and renewal and replacement needs. If methodically addressed, the City can spread these projects over the next 10 years.
Historically, the City has spent an average of $97 thousand per year from FY2022/23 to FY2023/24 on capital projects. The projected annual capital cost is to increase to $1.3 million per year to support needed and long delayed projects. The water capital fund includes the Cypress water tank and connecting pipelines, pipeline upsizing in the industrial park area for fire flow purposes, and renewal and replacement needs at the three well sites. Due to the high capital cost for the water tank, the rates account for debt financing much of the capital cost.
Operations and maintenance costs are increasing in response to double digit annual increases of the cost of wholesale water purchased from Sonoma Water, and significant utility, materials and supplies, and insurance cost increases. The chart on page 15 of the report shows the projected water fund balance steadily being drawn down over ten years to the target reserve level.
Utility Rate Revision Process
Following the Study’s acceptance by the City Council, staff conducted 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. The required Proposition 218 notice mailed to property owners is attached hereto.
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 Study, provided that there is no majority protest.
Financial Considerations
The recommended water rate increase for the summer of this year is consistent with the draft FYs 2025/26 and 2026/27 City Budget for the Enterprise Funds. If a lower percentage was adopted, capital projects may be canceled to provide budgetary savings with lower revenue projections. Although water system revenues are marginally sufficient to cover operating and maintenance expenses and debt service obligations, the revenues are insufficient to maintain a prudent Operating Reserve while simultaneously providing adequate funding for the capital program.
The current sewer system revenues are not sufficient to cover operating and maintenance expenses and the operating reserve is used to make up the short-fall in the short term, but this is not sustainable. The annual rate adjustments reverse this situation and the enterprise’s revenues are projected to be sufficient to meet expenses after a few years of adjustments. The increasing operating and maintenance costs are primarily driven by the projected increased wastewater treatment costs of the subregional system. Additionally, sufficient capital is needed to address repairing and replacing aging sewer pipelines, which in turn will moderate future increases from the subregional system.
Environmental Issues
Adoption of the proposed water and sewer rates involves the establishment, modification, restructuring or approval of rates and charges, as identified and analyzed in the Study, including rates and charges to obtain funds for meeting operating expenses, purchasing or leasing supplies, equipment or materials, meeting financial reserve needs and requirements and/or obtaining funds for capital projects necessary to maintain service within existing service areas. Therefore, adoption of the resolution setting rates and charges is not a project under the California Environmental Quality Act pursuant to California Public Resources Code Section 21080(b)(8)(D) and 14 Cal. Code of Regs. Section 15273.