DATE: March 25, 2024
TO: President and Members of the Estero Municipal Improvement District (EMID) Board of Directors
VIA: Stefan Chatwin, District Manager
Marlene Subhashini, Assistant District Manager
FROM: Andrew Brozyna, Public Works Director/City Engineer Edmund Suen, Finance Director
DEPARTMENT: Public Works
Finance
SUBJECT: FIFTEEN YEAR WATER AND WASTEWATER FUNDS CAPITAL
IMPROVEMENT PROJECTS PROGRAM AND FUNDING PLAN
FOR THE PREPARATION OF THE DISTRICT’S FISCAL YEAR
2024-2025 BUDGET AND FIVE-YEAR FINANCIAL PLAN
RECOMMENDATION
It is recommended that the EMID Board of Directors receive and accept the District’s 15-year Water and Wastewater Funds Capital Improvement Projects Program and its funding plan for the preparation of the District’s Fiscal Year 2024-2025 budget and 5- year financial plan.
EXECUTIVE SUMMARY
In 2010, the EMID Board approved a funding strategy for its Water and Wastewater Capital Improvement Projects (CIP) in the form of a Long-Term CIP Funding program.
The current model uses a 15-year capital expenditure forecast and funds those forecasted needs on an annual basis. The District also generally refrains from using debt to finance its capital projects unless it is necessary because of the magnitude of the project (e.g., the Wastewater Treatment Plant (WWTP) project).
The Capital Improvement Reserve balances, inclusive of the minimum $2 million emergency reserves in both the Water Fund and Wastewater Fund, are projected to be $5.64 million and $8.78 million respectively on June 30, 2024.
Based on the 15-year Water CIP assessment, City staff identified an annual funding need of $1 million. In the Wastewater Enterprise, staff has identified $56.19 million of CIP projects (of which $10.10 million are for the WWTP project that is cash funded) over the next two years through FY 2025-26. As a result, annual funding of $7.60 million is needed for 2 years before leveling to $3.1 million annually for the remaining 13 years of the 15- year CIP Plan. These funding levels have been incorporated into the rate recommendations which are detailed in separate reports on this agenda.
BACKGROUND
The EMID Board of Directors has made it a priority to ensure that the District’s infrastructure is well maintained on an ongoing basis. Such proactive maintenance, repair, and replacement of infrastructure ensures that key systems are operating at peak levels, promotes safety, provides for a continuity of services to the community, maintains property values, and maintains the quality of life that the community has come to expect.
In the District’s early years, capital improvement efforts were primarily focused on the construction of new infrastructure. Now that the District is built-out, there has been a transition from new construction to infrastructure maintenance and replacement (e.g. the WWTP project). This affects how the District characterizes and funds future CIP programs.
Maintenance vs. CIP
Managing the District’s infrastructure manifests itself in the following ways:
•Proactive Maintenance Activities – The preventative maintenance efforts of the District’s Maintenance crews on an ongoing basis reduce the overall future costs of District infrastructure. These ongoing operating costs offset the magnitude and expense of future infrastructure replacement projects.
•Recurring Capital Improvement Projects (CIP) – Some CIPs are considered “recurring” and amount to significant repair work, such as pipe repairs, water valve replacements, and water tank lining and coating projects. The underlying infrastructure is still usable, but these larger maintenance efforts help to extend the useful lives of the underlying infrastructure.
•Infrastructure Replacement/Construction Projects – Other CIPs are considered so significant in nature that the entire infrastructure is replaced or built anew.
Examples include the Lift Station rehabilitation projects and the WWTP project.
The District has historically considered the latter two categories (Recurring CIPs and Infrastructure Replacement/Construction) as Capital Improvement Projects, and has funded these projects out of specifically designated CIP funds within each respective Enterprise fund. The District has also incorporated long-term CIP projects in its rate models so that the burden of such projects can be planned for and incorporated into the rate structure to mitigate the impact on customers over a longer period.
ANALYSIS
Approach
The District hired Bartle Wells Associates (BWA) to update the water and wastewater rate model to include the fiscal impacts of the WWTP project on the Long-Term CIP funding analysis and in light of current maintenance efforts, assessment of replacement requirements, and replacement costs in the following categories:
Water System
•Fire Hydrants – these important safety amenities are included in the water operations
•Water Infrastructure – this includes pipes, valves, seismic retrofits, water tank improvements (not replacement), and other elements of the delivery of water from the point of the District’s water structures to delivery at customers’ properties •Water Structures – this includes the four (4) water tanks and the booster pump station located at the Corporation Yard
Wastewater System
•Pipelines – the primary means of collecting wastewater from customers and transporting it to the Wastewater Treatment Plant in San Mateo •Valves – which serve as critical junction and shutoff points within the system •Lift Stations – since Foster City is relatively flat, Lift Stations and their accompanying generators assist wastewater to flow through the system to the wastewater treatment plant where gravity would otherwise serve this purpose •Parallel Force Mains – critical elements at key points that connect the wastewater system
Next, District staff considered the level of maintenance and serviceability of capital assets in order to determine the appropriate estimated useful lives of each asset. District staff also considered the relative costs associated with such maintenance to evaluate the cost- effectiveness of such maintenance efforts.
15-Year CIP and Key Changes from the Prior Year (Attachments 2 and 4 for Water and Wastewater respectively)
The Capital Improvement Plan has been updated to best reflect the recommended projects needed in the 15-year term. Some key changes include the addition of five (5) new water projects and 2 new wastewater projects not previously included in the plan, as well as the removal of projects that are currently funded and not anticipated to require additional funding in future years. Some projects reflect an expanded scope of work and some were updated based on the significant inflationary increases currently being observed in the construction market. Specific and detailed information about the calculations performed and the 15-year projects are found in Attachments 1 to 6 to this report.
Assumptions
Funding Sources
In each category of capital projects, initial assumptions were made as to the funding sources of the various assets (typically enterprise operating fund transfers to the enterprise CIP Fund, equipment replacement fund, and/or connection fees). If an asset’s replacement value was considered so significant that the only effective funding option was to use debt financing (in the form of bonds, federal and state programs, bank loans, etc.) those assets were excluded. The asset categories and their typical funding sources for the Water and Wastewater enterprise are as follows:
Water System
•Fire Hydrants – hydrants do not typically call for replacement; operating funds are used to replace hydrants which are damaged or require repair •Valves – CIP funding is needed to replace, rehabilitate or repair various infrastructure elements such as pipes, valves, and other elements mentioned above when necessary; system wide replacement of each element type is not anticipated short of a catastrophic event
•Water Structures – water tanks have very long lives; lining in the three steel tanks requires CIP funding approximately every 15 years
•Water Meters – funding for meters that are replaced as part of CIPs is included in the analysis. Some water meter replacements that are in the Equipment Replacement Fund or replaced during maintenance operations are not considered as part of this analysis
Wastewater System
•Pipes – CIP funding for pipes requiring rehabilitation or repair; system-wide replacement of pipes is not anticipated short of a catastrophic event •Valves – valve replacement costs are included in CIP plans. •Lift Stations – lift station rehabilitation projects require CIP funding; generators, their transfer switches, and portable generators that are funded through Equipment Replacement funds and are not considered as part of this analysis •Parallel Force Mains – force main replacement requires CIP funding •Wastewater Treatment System (WWTP) – rehabilitation that San Mateo is undertaking under its 10-year integrated Wastewater Master Plan (Clean Water Program) for which the District will be responsible for its proportionate share of costs of approximately $157.3 million. Much of its costs are funded through debt financing with surplus working capital providing the balance of funding.
Expenditure Assumptions
Replacement values were reviewed and updated from the prior year’s analysis as necessary. All values were expressed in terms of future replacement, taking into consideration factors such as inflation, project size, timing and construction contingency funding.
Revenue Assumptions
In both the cases of Water and Wastewater rates, CIP funding is considered as part of the “fixed costs” of each system and is included in the existing rate model which projects costs over a 10-year period using a “pay-as-you-go” philosophy. The rate model does not reflect the actual expenditures on CIPs; rather it reflects the annual planned funding from this 15-Year analysis.
15-Year Funding Methodology
The District generally uses a funding methodology that looks at the total replacement value of assets that are scheduled to be replaced in the next 15-year window, and then averages the replacement amount over the 15-years. The Public Works Department prepared the 15-year project list considering replacement value, timing, and necessity.
Based upon staff’s review of the components of the 15-Year CIP funding needs, the scenario generates an annual CIP amount averaging $1.21 million for Water CIP projects, and $3.75 million for Wastewater CIP projects.
This funding amount is then compared to the available fund balance reserves, and those reserves are compared to the cash flow requirements to fund projects in the 15-year forecast. The EMID Board of Directors' minimum emergency reserve requirement for capital improvement projects is $2 million each for the Water Capital Improvement Projects Fund and the Wastewater Capital Improvements Project Fund. The 15-Year Fund Balance analysis then reduces the 15-Year Average CIP funding to maintain the Capital Projects Fund Reserves in each fund above the $2 million minimum reserve threshold over the 15-year forecast.
In the attached analysis, the Water Capital Improvement Plan’s annual funding requirement is $1 million over the 15 year CIP plan (Attachment 1). The proposed annual funding for the Wastewater program is scaled because of the high value of projects, predominantly $10.10 million of WWTP costs in the first two years of the 15-year CIP Plan. As a result, the annual funding for these two years is $7.60 million before leveling down to $3.10 million for the following 13 years (Attachment 3). Effective FY 2024-2025, the remaining costs to complete the District’s share of the WWTP project will be entirely cash funded as the District is expected to have accumulated adequate working capital for the completion of this project.
Conclusion
Staff seeks EMID Board comments on District’s 15-year capital improvement projects as well as direction to implement the funding plan that includes $1 million of annual transfers from the Water Operating Fund to the Water CIP Fund and $7.60 million of annual transfers from the Wastewater Operating Fund to the Wastewater CIP Fund for FY 2024-2025 and FY 2025-2026 followed by $3.1 million of annual transfers for the next 13 fiscal years for the preparation of the Enterprise Funds’ Fiscal Year 2024-2025 budget and 5-year financial plan.
CEQA
Not Applicable
FISCAL IMPACT
If approved, the FY 2024-2025 Preliminary Enterprise Budget and Five-Year Financial Plan will be prepared to include $1 million of annual transfers from the Water Operating Fund to the Water CIP Fund over the next five (5) years and $7.60 million of annual transfers from the Wastewater Operating Fund to the Wastewater CIP Fund for FY 2024- 2025 and FY 2025-2026 followed by $3.1 million of annual transfers for the following 3 years, which will also be used to calculate water and wastewater rates for FY 2024-2025.
CITY COUNCIL VISION, MISSION, AND VALUE/PRIORITY AREA
Sustainability
ATTACHMENTS
Attachment 1 – Water Enterprise CIP Funding Strategy
Attachment 2 – Water Enterprise 15-Year CIP Costs
Attachment 3 – Wastewater Enterprise CIP Funding Strategy Attachment 4 – Wastewater Enterprise 15-Year CIP Costs
Attachment 5 – Water and Wastewater 15-Year CIP Comparison Attachment 6 – Capital Improvement Program Fiscal Year 2024-2025 through Fiscal Year 2038-2039