Item No. 9.
TO:HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM:OFFICE OF THE CITY MANAGER
BY:MATTHEW BAUMGARDNER, DIRECTOR OF PUBLIC WORKS/CITY ENGINEER DATE:OCTOBER 28, 2025
SUBJECT:DISCUSSION REGARDING CITY OF DOWNEY WATER RATES
EXECUTIVE SUMMARY
The City Council will receive and discuss an update regarding Downey water rates. At its February 25, 2025 meeting, the City Council received an informational update on the City of Downey Water System. The purpose of that report was to provide an overview of the system, while outlining steps that staff has taken to increase emergency preparedness, as well as starting the discussion on the need to analyze the water rates to cover the increasing costs of operating the system. At that time, the City Council directed staff to continue with the water rate analysis and return at a future meeting with the findings and next steps. This report serves as an update to the City Council on the water rates analysis, which includes the proposed increases to the rates, staff's outreach plan to the community, and next steps required by the City Council to adopt new rates.
RECOMMENDATION
That the City Council:
1. Receive an update on the proposed City of Downey water rates; and,
2. Direct staff to move forward with:
a. Holding community informational sessions to discuss the proposed water rate increase; b. Finalizing the water rate analysis; and
c. Returning to the City Council at its November 18, 2025 meeting to consider initiating Proposition 218 proceedings, which are required for the adoption of new water rates.
BACKGROUND
The City of Downey's water system serves approximately 20,000 residential and commercial customers by extracting ground water from 20 active wells dispersed throughout the City. The demand on the system on an average day is 13,000 gallons per minute (gpm). This can be met by operating 9 of the 20 wells. Following the power outage of December 24, 2024, staff took steps to get backup generation available at 9 wells to ensure that the system can remain operational during an extended power outage affecting the entire system.
Downey's water is unique in that it does not require any sort of disinfection and currently does not need to be treated. As as result, it can be pumped from the ground, directly put into the distribution system, and delivered to customers. Once the groundwater is pumped from the wells, it is delivered to customers through a system of approximately 258 miles of water mains. Service connections that tap into the water mains bring water to the individual customers. The system is maintained by 19 full-time field employees. An additional nine administrative and engineering staff members focus on the planning, engineering, regulatory compliance, and customer service needs required to keep the system functioning at its high level.
Over the last 10 years, the various costs associated with operating and maintaining the water system has grown from approximately $13 million to $18 million on an annual basis. This is due to cost increases in labor, materials, equipment, electricity, regulatory compliance, and the assessment that is paid each year to the Water Replenishment District for pumping groundwater. During this same period, revenues have reduced from $18 million to $17 million a year, mainly as a result of reduced usage from conservation. As a result, the difference between annual revenues and expenses have gone from approximately $5 million each year down to zero. In the past, the difference between the revenues and expenses was added to the Water Fund - unrestricted fund balance each year to fund all of the necessary equipment purchases, as well as critical construction projects that are incorporated in the Capital Improvement Program (CIP) to provide for necessary system replacements and upgrades. In previous years, the difference between revenues and expenditures was able to support annual improvements to the system without significant reduction to the unrestricted reserve balance. However, as this difference has been approaching zero over the last several years, equipment and CIP projects needed each year to keep the system operational have reduced the unrestricted reserve balance to approximately $4 million at the start of Fiscal Year 2025-2026.
Following an update on the water system at its meeting of February 25, 2025, the City Council directed staff to continue its efforts to analyze the need for an increase to the water rates. It should be noted that the City has not undergone any effort to analyze the water rates since Fiscal Year 2015-2016. This was the last time there was an increase in water rates. As stated earlier, ten years ago there was an approximate $5 million difference between revenues and expenses to keep ahead of the costs of operating the system. It was determined at that time that the City could continue to operate its water system under its current revenue structure. However, in the ensuing ten years, inflation has driven all of the water system's operational costs up to the point where the water fund has just enough revenues to cover expenses each year. In addition to these increases in operational costs, the City has to stay ahead of an aging water system. The CIP projects that are undertaken each year focus on upgrading water mains, service connections, hydrants, meters, and all the equipment used to maintain them. Other vital projects include adding back-up power generation at the well sites to ensure the system can stay operational during a major power outage. Staff has secured portable back-up generation at sufficient wells to meet demand, but is taking steps to provide permanent back-up power generation and automatic restart of the wells so that there is very little delay in restoring the system during a power outage. Another critical component of the annual CIP is the rehabilitation of the City's water wells. Failure to stay on top of this effort would impact the ability to keep up with residential and commercial water demand. Finally, water systems across the State are now required to development treatment systems for per- and poly-fluoroalkyl substances (PFAS) down to a level of parts per trillion (ppt). The cost estimate to develop a PFAS treatment system for the City of Downey is approximately $125 million. The current deadline for Downey and all other water systems in the State is to have a treatment system operational by April 2031.
ANALYSIS
Current and Proposed Water Rates
The City of Downey has long enjoyed the lowest water rates in the region. A lot of this can be attributed to the fact that its water quality has been so good over the years and that no disinfection of the water is necessary before it enters the distribution system. Currently, the average single-family residence in Downey pays $29.95 for the water it consumes on a monthly basis. The new proposed rates will increase to $44.75. These rate increases are necessary in order to pay for growing inflation costs, building capital reserves to pay for the ongoing upgrades and critical back-up generation projects, and for the new PFAS treatment system. The chart below shows how the City compares with other agencies in the region for an average Single-family Residential household charge for water consumption:
As evident in the chart, while increasing $14.80 per month, the average single family residence in Downey will still have the lowest rates in the region. It should also be noted that the closest agency, the City of Paramount, is currently going through a process to increase its rates. This is an important fact as the City is able to maintain its low cost position within the region even though rates have not been adjusted for inflation for more than a decade, and while adding a new, mandated water treatment facility at a cost of $125 million. Going forward, staff recommends that yearly increases be reviewed to make sure that the water program rates are keeping up with inflation in the economy. This will prevent large increases from needing to be implemented, which are more alarming and problematic for the public when rate increases have to recover multiple years of skipped program inflationary costs.
Developing the Water Rate Model
The City engaged Raftelis, a consultant hired by many water agencies around the State, to review the water fund's financial outlook and prepare a rate model proposal that would address the program's operational and capital needs over the next five years. By taking a look at the City's starting balance in Fiscal Year 2025-2026 and looking ahead at what is needed, Raftelis worked with staff to look at all the ways the City could meet all of its financial and operational requirements while keeping the overall cost increase to customers as close to the lowest in the region as possible. The increases in needed revenues focused on the following:
Annual Inflation calculated at a minimum of 3% each year $5 million annual CIP contribution for ongoing system repairs and upgrades Build a $125 million PFAS treatment system
Staff went through several iterations of the rate model. At first, the City was exploring all avenues of financing for the treatment system from municipal bonds. Initially, it appeared as if the City would be looking at approximate financing terms of 5 percent over a 30-year period. The repayment of principal on that financing, whether through a low-interest bank loan or a municipal bond, would need to start in the same year the funds are received. As Raftelis presented the model with these financing terms, the team agreed that more work would need to be done to bring the rates down further. Staff reached out to the State Water Board, who oversees the State Revolving Fund (SRF).
Staff found that the Board provides financing for water treatment projects up to $50 million a project at a rate currently near 2 percent over a 30-year period.
One other key advantage in working with the SRF program is that it does not require payment on the principal of the loan until the construction is complete. They also provide the funds on a reimbursable basis, so the City would be approved up to $50 million on a project and only charged for what it used to complete the work. Staff devised a way to break the project into two separate phases - each phase qualifying for its own $50 million low-interest loan.
By doing this, staff has applied for and will receive up to $100 million at a low-interest rate near 2 percent. These funds will not require principal payments and only interest payments will need to be made during the construction period of the treatment system.
Available funds secured by City staff
In working with the SRF, staff was also able to secure a $25 million principal-forgiveness loan, which is essentially a grant that the City does not need to pay back. The City, along with many other water agencies, is also receiving approximately $15 million over time through settlements with manufacturing companies like Du Pont, Dow Chemical, and BASF for lawsuits brought forward against them regarding PFAS chemicals used in their manufacturing processes. This all resulted in costs savings within the projected rates.
Additional steps to keep increases as low as possible
Staff focused on only the most essential water CIP projects over the next five years. Instead of looking at $5 million in CIP projects annually, staff worked with Raftelis to develop a model that only considers up to 60% of that amount each year. In reviewing its most critical projects, staff feels this reduction to $3 million a year is feasible and will keep the system running optimally while keeping down the overall costs to customers in the near term.
By taking steps to find lower rate financing with more favorable payment terms; reducing annual CIP projects to only essential upgrades; and securing approximately $40 million in funds ($25 million from SRF and $15 million from PFAS settlements) to reduce the PFAS financing down closer to $85 million, staff and Raftelis have worked over the last several months to prepare a rate model that keeps up with operational and capital improvement needs for the next five years, all at the lowest possible cost. It is important to note that as part of these capital improvements, the City is taking important steps to add permanent back-up power generation at groundwater well sites, which is a critical aspect of the City's emergency preparedness during natural disasters and large-scale power outages. As stated earlier, while the rates will be increasing, Downey water customers will still experience the lowest water rates in the region, while staying compliant with PFAS treatment standards and maintaining a high-functioning, optimized water system into the future, which will remain resilient during both normal and emergency operational periods.
It is important to institute these rate increases at this time. As mentioned previously, the difference between annual revenue and expenditures each year is approaching zero. Annual inflation is going to drive these annual expenditures up to $20 million a year at the end of this next 5-year period. The rate increase will ensure that revenues are able to cover the annual operational costs of the system. The rate increases will also address staff's ability to continue with its CIP program and to make critical upgrades to the water system each year and address back-up power generation at the well sites to ensure resiliency. Finally, in order to be prepared to make payments on the financing the City will need to make starting in 2031, sufficient debt reserves will need to be built up over the next few years to satisfy the State Water Board that the City is in a position to cover the two low-interest loans taken out to cover the cost of the PFAS treatment system.
Next Steps
Staff will be going through a few necessary steps in order for the City Council to consider adopting new water rates by January 2026. These include some preliminary community outreach events to introduce the needs for the water rates to the community, which are planned to take place on November 6 and November 10, 2026. These events would be held in the evening at a location such as the City Council chambers or the Barbara J. Reily Community Center, depending on availability. Staff will seek feedback from residents on the proposed funding plan and will return at the meeting of November 18, 2026 for the City Council to receive an update on the community feedback received, the final water rates analysis by Raftelis, and consider initiating Proposition 218 proceedings. The purpose of the Proposition 218 process is to inform all property owners of the upcoming rate adjustments. This notice will clearly explain why the changes are needed, how they were calculated, and how customers can participate in the process.
If the City Council decides to initiate proceedings at the November 18th meeting, Proposition 218 notices will be sent out to all water customers by November 27, 2025. As of the date the notices are postmarked, the 45-day Proposition 218 period begins. Proposition 218 requires that all property owners have 45 days notice prior to the City Council making its decision at the noticed Public Hearing to consider the rate adjustments. This provides adequate time for property owners to review the rate study, participate in educational outreach hosted by the City, and determine if they intend to register a protest to the rate adjustments in writing. Should everything proceed as outlined in this report, the Public Hearing would be held at the January 12, 2026 meeting for the City Council to consider a Resolution adopting the proposed rates. At that time, a final tabulation of customers protesting the rate increases will be provided. A simple majority (50 percent plus one) of water rate customers protesting the rate increases would be required to end the proceedings.
Staff will be conducting additional outreach to the community in December and January ahead of the public hearing. A detailed outreach plan is being prepared and will be provided as part of the November 18 report to the City Council for its discussion and consideration. The plan discusses different opportunities to reach the community to inform and educate them on the need for rate adjustments. These include:
The Proposition 218 Notice
Dedicated Project page on the City's website, which acts as a central hub for project updates Bill insert to supplement the Proposition 218 notice
City's social media outlets
FAQ Document - covers the rate-setting principles, PFAS costs, affordability, and how to participate in the process
Community Open Houses - In person events offering one-on-one conversations with Raftelis and City Staff Community Webinar - Live online event featuring a presentation and moderated with Q&A with City Staff and Raftelis. To be recorded and hosted on the Dedicated webpage Educational Materials - Posters, handouts, counter cards
CITY COUNCIL PRIORITIES
Fiscal Responsibility
Quality of Life, Safety & Infrastructure
FISCAL IMPACT
None.
ATTACHMENTS
None.