Agenda Item No: Q.1
AGENDA REPORT
DATE: June 17, 2025
TO: Mayor and Council
FROM: David Gassaway, City Manager
SUBJECT: Resolutions 2025-118 and 2025 -119 PW P roposed Water Rate Increases and Adopting Procedures for Proposition 218
Resolution 2025-118 Authorizing the City Council to Direct Staff to Initiate the Proposition 218 Process and Setting a Public Hearing Relating to Proposed Increases and Modifications to the City’s Water Rates and Making Environmental Findings with Respect Thereto Pursuant to the California Environmental Quality Act
Resolution 2025 -119 Adopting Procedures for the Conduct of a Public Hearing And Majority Protest Proceedings Relating to Proposed Increases and Modifications to the City’s Water Rates in Accordance with Article X III D Of the California Constitution, the Proposition 218 Omnibus Implementation Act, and Government Code Sections 53759.1 And 53759.2
Funding Source: N/A
Contact: Michael J. Hether, (707) 428-7493
RECOMMENDED ACTION
Adopt the resolutions.
STATEMENT OF ISSUE
Fairfield Municipal Utility (FMU) provides water to the City of Fairfield on a continuous basis and is responsible for operating the existing water system, as well as ensuring that it is maintained to meet adequate service levels. On May 6, 2025, the City Council adopted the Public Utility Master Plan (PUMP), which evaluates the existing water system and develops a comprehensive water system Capital Improvement Program (CIP).
In conjunction with producing PUMP, the City retained Bartle Wells Associates (BWA) to prepare a water rate study using PUMP as the baseline guidance document for repair and replacement projects within FMU’s CIP. The water rate study was conducted in conjunction with PUMP to ensure that FMU can generate enough revenue to carry out mini mum prudent CIP needs while
meeting all operations and maintenance expenses, debt service and reserve requirements. The FMU is primarily funded by fees received from the ratepayers.
The water rates last increased in 2021. The current water rate study doc uments the need for a new water rates fee schedule.
DISCUSSION
Summary of Findings
FMU provides water to the City of Fairfield on a continuous basis and employs staff who are responsible for maintaining a system valued at over $500 million . This system compromises of two water treatment plants, 12 storage facilities, 17 pump stations, nearly 400 miles of pipelines and fixtures (hydrants, valves, etc.), and over 30,000 water services. The water system, which is operated by talented, dedicated and highly trained staff, contains extensive and well-maintained facilities that incorporate redundant design features, ensuring reliability with few service interruptions or emergency repairs. For these extremely valuable community assets to remain in good condition , on -going investment in the proper maintenance and repair of the water infrastructure is critical.
Generally, CIP projects identified within PUMP primarily address the following: (1) age and declining condition of the water system assets; and (2) capacit y and deficiencies in system performance. Over the past several decades, the water system was kept in good operating condition through continued investment and proper execution of preventative maintenance and repair activities. However, based on the usefu l life of the current water system, it is expected that FMU will begin to face large, annual, and ongoing capital funding needs starting approximately 8-10 years out, which will continue decades into the future as the existing water system continues to age. Projects identified in PUMP were categorized and are planned for working well before aging system failures.
As the water system continues to age, FMU is expected to provide adequate service levels. There are several factors used to define service level:
1) The amount of water available.
2) The quality of the water delivered.
3) The continuity of service and regular delivery of water with minimal disruption and cost.
The City excels in building redundant facilities and maintaining the system, which has resulted in few service interruptions or emergency repairs.
To prioritize future water system CIP and maintenance programs, analysis of the physical condition and operating capabilities of current water system assets were summarized in PUMP.
This analysis gives a clearer picture and informs decision making regarding risk level and criticality. All water system assets were evaluated using industry standard risk assessment procedures that consider the likelihood of failure (LOF) and consequence of failure (COF). The LOF assesses the probability that an asset or facility will fail to perform at its prescribed service level, and the COF considers the effects resulting from such a failure. The risk score was then determined using both LOF and COF (Risk Score = LOF x COF).
For example, as our unseen buried pipelines and fixtures (e.g. valves, service laterals, etc.) approach the estimated end of useful life (EUL), it is critical that significant investments be made to reduce water system outages. As it pertains to buried pipelines and valves, rehabilitation and replacement programs were developed and prioritized based on the remaining useful life (RUL).
Expected improvements were forecasted and prioritized based on EUL and RUL with the basic understanding that some projects are needed as soon as practical, while others will need to be planned. It is more critical now to enact certain maintenance programs (e.g. , large valve replacements) that may not have been conducted in the past, especially as certain critical assets approach their EUL.
The last water rate increases were implemented January 1, 2018, through January 1, 2021 (4% annually). The City’s past practice of routine, modest rate increases to avoid large rate spikes has served the community well. Historically, FMU provided strong financial management with small annual rate adjustments to keep revenues in line with the cost of providing service while maintaining healthy fund reserves. W hile staff have worked hard to ensure efficient operations and continued improvement in controlling costs, FMU has experienced substantial increases in operating and maintenance expenses over the last 4-1/2years, most of which are market driven.
Since rates were last adjusted on January 1, 2021, FMU has experienced significant cost increases in electricity, chemicals, materials, professional services and public employee’s retirement system (PERS) funding requirements. Generally, utilities face higher infl ationary increases than the consumer price index (CPI), which measure s consumer inflation. Due to the increase in operating expenses over the past several years, current water rates barely cover the annual operating expenses and debt service and only gener ate minimal funding for capital improvements. Additionally, rate increases are also needed to ensure compliance with the City’s debt service coverage covenants in connection with outstanding water debt.
In summary, after 4-1/2 years with no rate increases, the City needs to increase water rates to:
1) Recover operating costs which have increased significantly 2) Phase in funding for high -priority capital improvements to the City’s aging water infrastructure
3) Ensure compliance with the City’s debt service coverage covenants in connection with outstanding water debt
Careful management and efficient operations have allowed FMU to operate through drought and post COVID-19 marketplace conditions. While FMU’s financial position remains stable in the short term, maintenance, rehabilitation and replacement of existing water infrastructure assets is a near-term need.
Proposition 218 Notice and Majority Protest Process and Exhaustion of Administrative Remedies Requirement
Water rate increases are subject to Proposition 218’s (Article XIII D of the California Constitution) public hearing and majority protest procedures. Staff recommend that the council adopt Resolution 2025-118 to initiate the process, schedule a public hearing, and direct staff to provide notice of the public hearing in accordance with Proposition 218. FMU staff will engage in public education over the next several months, provide mailed notice of the public hearing in accordance with the requirements of Prop osition 218, and substantially in the form included as Exhibit D.
At the conclusion of the public hearing, written protests received from property owners and water customers will be tabulated (with only one protest per parcel counted) to determine whether a majority protest exists (i.e., written protests represent more than 50% of all the parcels receiving water service). The council cannot adopt the proposed water rate increases if a majority protest exists.
Proposition 218 authorizes the City to adopt procedures for the conduct of the public hearing and majority protest proceedings. Staff recommends the council adopt Resolution 2025-119. The procedures describe in detail how written protests can be submitted and how they will be counted for purposes of determining the existence of a majority protest.
The procedures also establish a new optional exhaustion of administrative remedies requirement, pursuant to Assembly Bill (AB) 2257, which became effective January 1, 2025. Staff recommend that t he council adopt an exhaustion of administrative remedies requirement because it is designed to provide an opportunity for the City to address objections during the Proposition 218 public participation process, reducing the likelihood of litigation after r ate increases are approved. The City must provide a period of at least 45 days after the notice of the public hearing is mailed for persons and entities to submit to the City written objections that allege that the proposed rates do not comply with the su bstantive requirements of Proposition 218. The notice of the public hearing states that a failure to timely object in writing bars any right to challenge the proposed water rates through a legal proceeding. The council must adopt written responses to all timely submitted written objections prior to or during the public hearing.
Pursuant to the proposed schedule for the Proposition 218 proceedings, notice of the public hearing will be mailed by July 11, 2025, the last date to submit an AB 2257 written objection will be August 27, 2025, the council will consider written responses to the written objections on October 2 1, 2025, and the public hearing will be held on November 4 , 2025 . If the council approves the rate increase, the new water rates will become e ffective on January 1, 2026, with rate increases on each subsequent January 1 through January 1, 2030.
Summary of Recommendations
Fairfield’s water rates are currently among the lowest in the region, based on a survey of 16 regional water agencies. Over the past two years, City staff have worked closely with West Yost, a water engineering consultancy firm, to create the PUMP. BWA has evaluated the findings within PUMP and prepared the water rates study for the public hearing on the proposed water rate increases. BWA’s Water Rate Study Summary of Findings and Recommendations is included as Exhibit C to this Report.
BWA recommends simplifying and standardizing the City’s water rates, realigning rates with cost of service, and charging the rates consistently for all water customers. BWA developed three draft financial and rate scenarios differentiated by the level of water system capital improvement funding. All scenarios assume projected rate increases are phased in over five years (each January 1, from 2026 through 2030) to help minimize the annual impact on ratepayers. The draft financial and rate scenarios include the following:
A. Support Water Master Plan: a combination of 12% increases for 3 consecutive years and 10% increases for two years thereafter (5 year s total). After full phase -in of rate increases, the City’s water rates would support approximately $1 0 million (current $) per year of annual funding needed to address ongoing, longer -term capital funding needs as recommended in PUMP.
B. Reduced Rate Increases: 10% annual rate increases for each of the next 5 years. After full phase-in of rate increases, th e City’s water rates would support approximately $ 8 million (current $) per year of annual funding needed to address ongoing, longer-term capital funding needs as recommended in PUMP.
C. Further Reduced Rate Increases: 8% annual rate increases for each of the next 5 years. After full phase-in of rate increases, the City’s water rates would support only approximately $ 5 million (current $) per year of annual funding needed to address ongoing, longer-term capital funding needs. While this is substantially lowe r than the average annual funding levels recommended in PUMP, additional rate increases could be phased in in future years to support long-term capital needs.
The full Summary of Findings and Recommendations, along with methodologies and analysis regarding cash flow, financial and rate projections are included in Exhibit C.
Based on the options summarized above and included as Exhibit C, staff recommend an 8 % annual rate increase for the next five years. In the absence of a majority protest, the council may adopt the proposed water rate increases set forth in this notice of the public hearing or may adjust the rates in response to written and oral comments provided that the adopted water rates do not exceed the rates set forth in this notice.
As part of the proposed schedule of rate increases, staff recommend providing for the potential pass-through of increases in wholesale water costs. The City purchases wholesale water and has no control over its cost s. The City estimated future wholesale c osts in the water rates study.
However, if wholesale costs per unit are higher than predicted, the City may pass through to customers the increase in wholesale water purchase costs. The pass -through will be calculated as an increase in wholesale water pur chase costs divided by customer annual volumetric water use. Notice of any adjustment to the pass-through costs will be given not less than 30 days before the effective date of the adjustment. However, no additional Proposition 218 public hearings will be required in connection with the adjustments during the five-year water rates schedule described in this Report.
Finally, in conformance with the existing Fairfield Municipal Code, customers within a portion of the Willotta Oaks subdivision have a history of paying 1-1/2 times the amount of the current City of Fairfield’s water rates. Moving forward, Staff recommends providing for the potential pass - through of increases and charge the same amount as what the City of Vallejo charges the City of Fairfield for water service to those customers within Willotta Oaks.
California Environmental Quality Act
This item is not subject to the California Environmental Quality Act (Public Resources Code Section 21000 et seq.) (CEQA) because CEQA does not apply to the establishment, modification, structuring, restructuring, or approval of water rates under Public Resources Code Section 21080(b)(8). The proposed water rates are proposed to meet operating expenses, purchase necessary supplies and equipment, meet financial reserve needs, and fund capital projects necessary to maintain service within the existing service area. Furthermore, it is not a “project” as defined under California Code of Regulations Title 14, Section 15378(b)(4). This item is also exempt from CEQA p ursuant to California Code of Regulations Title 14, Section 15061(b)(3) because it can be seen with certainty that the approval of water rates will not have a significant effect on the environment.
FINANCIAL IMPACT
If the 8% annual rate increases are adopted, the high priority water system improvements identified in PUMP would be partially deferred and spread over approximately 9 -10 years. The current rates generate minimal revenue to conduct any capital improvement projects and leaves the enterprise fund in an operational deficit (if no rate increases are implemented). After the 5- year phase-in of rate increases, the 8% rate increases will enable the City to fund its projected operating and debt service expenses, and enable the City to accomplish annual rate revenues of approximately $16 million per year for existing and new debt service, and ongoing capital funding needs, leaving approximately $5 million per year to help fund ongoing capital needs (i.e. funding approximately ½ of ongoing future capital funding needs) . Without rate increases, the water enterprise funds (461 and 462) are projected to have annual deficits ranging from $12 million to $24 million and a negative working capital by fiscal year 2027-2028.
PUBLIC CONTACT/ADVISORY BODY RECOMMENDATION
N/A
ALTERNATIVE ACTION
The council may choose not to adopt the resolutions, but in doing so, it would undermine FMU’s future financial security.
COORDINATED WITH
City Attorney’s Office and Finance Department
STAFF CONTACT
Michael J. Hether, Assistant Director of Public Works - Utilities (707) 428-7493
[email protected]
ATTACHMENTS
Attachment 2: Proposed Resolution 2025-118
Attachment 3: Exhibit B Proposed Resolution 2025-119
Attachment 4: Exhibit A Procedures for Conducting a Public Hearing Attachment 5: Exhibit C Water Rate Study Summary of Findings and Recommendations Attachment 6: Exhibit D Draft Notice of Public Hearing for Proposed Water Rate Adjustments