DATE: May 15, 2024
TO: Council Budget & Finance Committee
FROM: Director of Public Works
SUBJECT: Water Resource Recovery Facility (WRRF) Improvements, Phase II – Project Funding Strategy Update
RECOMMENDATION
That the Committee reviews and comments on the Water Resource Recovery Facility (WRRF) Improvements, Phase II – Project Funding Strategy Update.
SUMMARY
This report provides an update to the CBFC on the funding strategy of the WRRF Improvements – Phase II Project (Phase II Project). The project includes upgrades to the treatment process to enhance the treatment capabilities of the WRRF and to reduce the discharge of nutrients to the bay in compliance with the Regional Water Quality Control Board’s upcoming 3rd Watershed Permit. This project also includes construction of a new Administration Building and Laboratory. The total project cost is estimated to be between $394 and $534M. Staff will provide a review of the financing scenarios in various sources of funding and projecting out the future debt services repayment, cash flow, and sewer rate impacts at the meeting for further discussion.
BACKGROUND
The core infrastructure of the Water Resource Recovery Facility (WRRF), formerly known as Water Pollution Control Facility (WPCF), was originally constructed in 1952 to treat wastewater flows from the City’s residents and businesses prior to discharge into the San Francisco Bay. Over the years, the WRRF has undergone several major upgrades to meet more stringent discharge requirements, as well as increasing capacity as the City’s population and industry have grown. The WRRF now treats an average flow of approximately eleven million gallons per day (MGD) and meets current regulatory requirements for discharge of treated effluent to the deep waters of the San Francisco Bay (Bay).
In response to growing concerns about nutrients and their impacts on the Bay, in May 2019, the San Francisco Bay Regional Water Quality Control Board (Water Board) announced upcoming regulatory requirements limiting discharge of nutrients (nitrogen) to the Bay. Currently 37 publicly owned treatment works discharge treated effluent to the Bay, representing about 2/3 of the annual nitrogen loads to the Bay. In February of 2024, the Regional Water Quality Control Board released the Draft version of the 3rd Nutrients Watershed Permit. As currently written, this permit would require the East Bay Dischargers Authority (of which the City of Hayward is a member) to reduce nutrients by approximately 50% by 2034.
In June 2020, the City completed a comprehensive Master Plan update, the WPCF Phase II Facilities Plan (Facilities Plan) that identified improvements required to reduce nutrients in the treated effluent. In July 2022, Council authorized awarding design and engineering services during construction to Brown & Caldwell for the Phase II Project. In March 2024, Council authorized entering into a professional services agreement with Carollo Engineers to provide construction management services for the Administration Building, the Primary Effluent Equalization Facility, and the Phase II Project for a total not-to-exceed amount of $19,705,937, with an initial authorization of $949,625 for preconstruction services.
On December 12, 2023, Council authorized the City Manager to sign the WIFIA Letter of Interest (LOI) and subsequent application, and for the City Manager to be the authorized representative for the City in carrying out the City’s responsibilities under the Letter of Interest and Financial Assistance Application including compliance with applicable state and federal laws. The total project cost eligible for funding, at the time, was estimated to be $410 million. Of the total project cost, 49% of the total cost is eligible for WIFIA funding, which was approximately $200 million and stated in the authorized resolution. Staff submitted the WIFIA LOI to the EPA in February 2024, with the Council authorized resolution.
In March 2024, the EPA formally invited the City to submit a WIFIA Application. As the project design is further refined, and other WIFIA financing eligible costs have been estimated, the upper range of the estimated project cost has increased from $410 million to approximately $530 million, which increased the total 49% of eligible costs for WIFIA funding from $200 million to approximately $260 million. Subsequently, in April 2024, Council authorized applying for and increasing the USEPA WIFIA loan amount up to $260 million.
DISCUSSION
The main goal of the Phase II Project is to construct improvements necessary to enhance treatment capabilities of WRRF and to achieve nutrient reduction in compliance with the Water Board’s upcoming 3rd Watershed Permit limiting discharge of nutrients to the Bay. A summary of the project construction cost, capital cost, and financing options is presented in the following sections.
Construction Cost Update
Construction cost estimates have been updated for the Administration Building and the Primary Effluent Equalization Facility based on 90% and 60% design levels of completion, respectively. Phase II project elements are based on 30% design level of completion and are also updated to reflect the updated construction schedule and escalation factors for the new estimated midpoint of construction dates for the various elements. Because the overall estimated construction duration of the Phase II project increased by a year, some of the project elements that are constructed later in the project such as the grit facility and the final clarifier retrofits experienced cost escalations over previously presented costs. Nutrient treatment upgrades costs also reflect the addition of bypass pumping, or management of the water flow during construction phases, for primary effluent because the PE EQ Facility is constructed in parallel with the Phase II Improvements. These costs will continue to be updated as the project progresses to the 60% design level of completion which is expected to be completed in June 2024.
Table 1 – Estimated Construction Cost(1)(2)
Project Element
Estimated Construction Cost(3)
(December 2023)
Current Estimated Construction Cost (April 2024)
New Grit Facility
$21.0M
Range $15 - $32M
$22.9M
Range $16 - $34M
New Primary Equalization (PE EQ) Tanks
$21.3M
Range $15 - $32M
$ 29.5M
Range $25 - $35M
Nutrient Upgrades
$134M
Range $94 – $201M
$136M
Range $95 - $204M
Existing Final Clarifiers Retrofits
$25.1M
Range $18 – $38M
$26.8M
Range $19 - $40M
New Administration Building and Laboratory
$31.9M
Range $27 - $38M
$34.8M
Range $31 – $40M
Site Waste Pump Station (SWPS) Improvements
$1.5M
Range $1.0 to $2.2M
$1.4M
Range $1.0 – $2.2M
3W System Upgrades
$4.8M
Range $3.4 to $7.2M
$4.6M
Range $3.3 - $7.0M
Total Estimated Construction Cost
$239M
Range $173 to $350M
$256M
Range $191 - $363M
Notes:
Soft costs including design, engineering services during construction, construction management, inspection, materials testing, etc. are not included in the above costs.
Range reflects the accuracy of the estimate based on the design level of completion. The Administration Building and Laboratory estimate at 90% design level of completion (Class 1) range of accuracy is -10% to + 15%. PE EQ Facility is at 60% design level completion (Class 2) with a typical range of accuracy of -15% to +20%. The remaining project elements at 30% complete (Class 4) have a range of accuracy between -30% to +50%.
Costs from the December 12, 2023 staff report Resolution Authorizing the City Manager to Apply for a United States Environmental Protection Agency (EPA) Water Infrastructure Finance and Innovation Act (WIFIA) Loan for the Water Pollution Control Facility (WPCF) Improvements – Phase II Project No. 07760).
Total Capital Cost
Total capital costs are in the process of being updated as part of the financing effort currently underway. Total capital costs include facility planning, engineering design, support services during construction, construction management, administrative change orders during construction, staff time, financing costs, and other miscellaneous items like the cost of obtaining a building permit, etc. The total estimated project cost ($530M) was presented in the April 16, 2024 staff report. A breakdown of the estimated capital cost is presented in Table 2. Note that the capital cost range presented is based on the construction cost estimate rather than including the low end of the range because costs generally have not decreased with increasing accuracies of the estimate on this project. The upper end of the range (also presented in Table 2) is currently being used for developing the financing strategy and for the WIFIA loan application. The dollar amount requested can be adjusted down without penalty prior to loan closing.
Table 2 – Estimated Total Project Cost
Element
Estimated Construction Cost
(April 2024)
Estimated Construction Cost High Range of Estimate
(April 2024)
Estimated Construction Cost
$256.3M
$363.5M
Administrative Change Orders (ACO) (10% of Construction Cost) $25.6M
$36.4M
Design and Engineering Services During Construction
$23.5M
$23.5M
Planning
$0.75M
$0.75M
Construction Management
$22.0M
$22.0M
Staff Time
$5.0M
$5.0M
Miscellaneous (Building permit, IT, LEED commissioning, etc.) $0.5M
$0.5M
Project Contingency (Assume 10% of Construction Cost and ACO) $28.2M
$40.0M
Financing Costs & Debt Service Reserve Funds (Estimated) $31.9M
$42.7M
Total Project Cost
$394M
$534M
Potential Financing Options
Staff are exploring funding opportunities for the Phase II Project as summarized in Table 3 below.
Table 3 – Potential Financing Options
Options
Amount
Progress
Federal
USEPA Water Infrastructure Finance & Innovation Act (WIFIA) Up to $260 million
(49% of project cost)
Application
in progress
State
Clean Water State Revolving Fund (CWSRF)
$50 million (max)
TBD, limited funding
Private
Municipal Bond(s)
$235 million
Not started
Cash
Wastewater Enterprise Fund
$25 million (5%)
/
Others
Water Resources Development Act Project Funding
TBD
Applied through
City’s lobbyist
Others
Grant
$0
Researching, none identified/fit thus far
As noted above, Staff is in the process of applying for a WIFIA loan and considering applying for funding from CWSRF in the future, as well as selling bonds. WIFIA funding can be applied to fund multiple projects, as well as retroactively reimburse for engineering design services, however, WIFIA funds can only cover 49% of the eligible project costs. The Administration Building will not be eligible to apply for CWSRF since it will not be able to score high enough to be on the eligible list. Only the Phase II Project is likely to score high enough to be eligible for CWSRF funding; however, loans are currently limited to $50 million in the FY 23-24 funding cycle, and competition is very high with many projects already included on the eligible funding list ahead of the City’s project and with higher scores/priorities. Furthermore, CWSRF may experience a funding hiatus where new projects are not considered for funding that could start in FY 25, therefore Staff are pursuing financing through bonds as part of the funding strategy. Staff will also continue to seek grants and other federal and state earmarks throughout the life of the project.
Annual Debt Services and Sewer Rate Impacts
The annual debt services payment and sewer rate impacts are dependent on the structure, timing, and draw schedule of each financing option. Staff has been working closely with the City’s financial advisor, NHA Advisors, to strategize the timing of various funding sources to minimize rate impacts, while maintaining cash reserve balances and debt service coverage requirement. The preliminary analysis indicates the estimated annual debt services in the future years to be approximately $35 million per year. This would only cover the debt service and inflation and does not include other additional operating costs and capital needs. The current annual wastewater operating budget is approximately $28 million total. With financing, the preliminary analysis of the projected sewer rate impacts is summarized in Table 4 below.
Table 4 – Projected Sewer Rate Impacts
Increase
FY25 (Adopted)
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
%
7%
9.5%
9.5%
10%
10%
10%
9%
9%
7%
7%
$/month for Standard Residential
/
$4.20
$4.60
$5.30
$5.83
$6.41
$6.35
$6.92
$5.87
$6.28
The majority of these rate increases would mainly cover the debt services and exclude other additional capital and operating cost needs. These preliminary rate impact projections will have to be confirmed through a formal rate study. Staff will provide a review of the financing scenarios in various sources of funding and projecting out the future debt services repayment, cash flow, and sewer rate impacts at the CBFC meeting for further discussion.
Recommended Sewer Rate Study
The WIFIA loan program and the municipal bond options require a credit rating report for the Wastewater Enterprise Fund. The credit rating indicates the credit risk of the borrower and predicts the City’s ability to meet financial commitments. The evaluation is typically performed by just a few external national financial institutions and the rating could have a significant impact on the interest rate of the prospective debt service. One of the critical factors that impacts the credit rating is the predictability of future revenue and ability to pay back the forecasted debt services. The major revenue source of the Wastewater Enterprise Fund is the revenue collected from sewer service rates. The City currently has a two-year rate adoption cycle every other year. Based on the preliminary analysis, the City’s financial advisor has recommended a five-year rate adoption process for the upcoming cycle in FY26 to FY30. This five-year adopted rate cycle signifies stability and guaranteed revenue in Wastewater Enterprise Fund for the next five years.
ECONOMIC AND FISCAL IMPACT
The current construction cost is estimated to be between $256 and $364 million, and the total project cost is estimated to be between $394 and $534M. This project will affect sewer service rates and sewer connection fees. As indicated above, the sewer service rate impacts in the next ten years ranges from 7% to 10% per year. These are preliminary projections and the actual rate and connection fee impacts will have to be confirmed by a formal rate and connection fee study.
STRATEGIC ROADMAP
This agenda item supports the various goals of Council’s Strategic Roadmap. The WRRF Improvements Phase II Project will address infrastructure needs and improvements to increase the reliability of the City’s treatment plant, and construct process improvements to meet more stringent nutrient limits in accordance with upcoming regulatory requirements, while supporting the goals of the Council. Specifically, this item relates to the implementation of the following projects:
Confront Climate Crises & Champion Environmental Justice.
Mitigate Climate Crisis Impacts through Resilient Design and Community Engagement Project C14b: Implement Shoreline Master Plan, including mitigating sea level rise in the industrial corridor through building requirements and outreach Invest in Infrastructure.
Invest in Water Supplies, Sanitation Infrastructure & Storm Sewers Project N19: Update Water Resource Recovery Facility Phase II Plan
SUSTAINABILITY FEATURES
The WRRF Improvement - Phase II Project will help maintain and improve the biology and health of the Bay which is vital for the region and the State. The Phase II Project will position the City to meet the nutrient limits as specified in the Water board’s 3rd Watershed Permit that requires plants to reduce nitrogen loading to the Bay.
The effects and risks of rising sea water levels will be reviewed and incorporated into the design of the new facilities and some retrofitted facilities where appropriate.
The Administration Building will be reviewed by the City’s Building Division for conformance with State and local requirements related to sustainability (i.e., California Building Code, California Energy Code, etc.) which requires a minimum level of energy efficiency, resource conservation, material recycling, etc. In addition, the building will be designed and constructed to meet the City required Leadership in Energy and Environmental Design (LEED) standards for a Silver Certification.
PUBLIC CONTACT
As part of the funding process, an environmental study (CEQA and/or Initial Study and Mitigated Negative Declaration) will be posted for public review and comment.
The project includes a web page to be hosted on the City’s website which is being periodically updated throughout the multi-year duration of the project.
NEXT STEPS
The following schedule has been developed for this project:
Submit WIFIA Application
June 2024
Approval of Environmental Study – IS/MND or CEQA
June 2024
Approval of Plans and Specifications and Call for Bids for the Administration Building August 2024
Award of Construction Contract for the Administration Building Project November 2024
WIFIA Loan Fully Funded
January 2025
Approval of Plans and Specifications and Call for Bids for the Phase II Improvements Project April 2025
Award of Construction Contract for the Phase II Improvements Project August 2025
Administration Building Project Construction Completion January 2027
Phase II Improvements Project Construction Completion
January 2030
Prepared by: Elli Lo, Senior Management Analyst
Reviewed by: Suzan England, Utilities Engineering Manager Recommended by: Alex Ameri, Director of Public Works
Approved by:
______________________________________
Dustin Claussen, Interim City Manager
https://hayward.legistar.com/LegislationDetail.aspx?ID=6448360&GUID=CB5A4ECF-8AF0-49B8-B838-81002AFE119D https://hayward.legistar.com/LegislationDetail.aspx?ID=6635303&GUID=E15C3971-6BB7-43C0-B855-89794911A013 https://hayward.legistar.com/LegislationDetail.aspx?ID=6448360&GUID=CB5A4ECF-8AF0-49B8-B838-81002AFE119D https://hayward.legistar.com/LegislationDetail.aspx?ID=6635303&GUID=E15C3971-6BB7-43C0-B855-89794911A013