Agenda packet — Milpitas City Council, December 6, 2022 (part 3 of 3)

No impact fee shall be
required for a
n ADU or

JADU

or for an ADU

that is less
than 750 square feet in floor area. For purposes of this paragraph, "impact fee" has the same meaning as the term "fee" is defined in the Mitigation Fee Act (Gov.

Code § 66000(b)), except that it also
includes fees specified in the Quimby Act
568
Item # 20.

Ordinance No. ___

(Gov. Code § 66477). "Impact fee" does not include any connection fee or capacity charge charged by a local agency, special district, or water corporation.

Any impact fee that is required for an ADU that is 750

square feet or greater in
floor area shall be assessed proportionally in relation to the square footage of the primary dwelling unit (e.g. the floor area of the primary dwelling divided by the floor area of the ADU, times the impact fees charged for a new

dwelling).

2. Utility Fees.

When

an ADU is constructed with a new single
-
family dwelling, a separate utility
connection directly between the ADU and the utility, and payment of the standard connection fee and capacity charge for a new dwelling, is r equired.

Except as described in Subsection
XI
-
10 -

13.08 (G)(2)(a)
,
C
c
onverted ADUs and
JADUs on a single
-
family lot that are created under Subsection XI
-
10 -

13.08(
F
D
)(1)(a)
above
are not required to have a new or separate utility
connection directly between the ADU or JADU and the utility. Nor is a connection fee or capacity charge required.

ADUs and JADUs that are not covered by Subsection XI
-
10 -

13.08(H)(2)(a) are
also not req
uired to have a new or separate utility connection directly between the ADU or JADU and the utility.

Except as described in Subsection XI
-
10 -

13.08(H)(2)(a), if a separate utility
connection is installed directly between the ADU or JADU and the utility, then a
connection fee or capacity charge will be required. The fee or charge shall be proportionate to the burden created by the ADU or JADU, based on either the floor area or the drainage
-
fixture units (DFU) values, as defined by the Uniform
Plumbing Code
, upon the water or sewer system.

Except as described in Subsection XI
-
10 -

13.08(G)(2)(a),
a
ll ADUs and JADUs
that are not covered by
Subsection XI
-
10 -

13.08 (G)(2)(b) require a new, separate
utility connection directly between the ADU and the
utility.

The connection
shall be
subject to a connection fee or capacity charge that is
proportionate to the burden created by the ADU on the water and sewer systems, based on either the floor area or the number of drainage -
fixture units
(DFU) values,
as defined by the Uniform Plumbing Code.

ii.

The portion of the fee or charge that is charged by the City may not exceed the reasonable cost of providing this service.

Nonconforming Zoning Code Conditions, Building Code Violations, and Unpermitted Structures.

1. The
C
ity
shall

not deny an ADU or JADU application due to a nonconforming zoning condition, building code violation, or unpermitted structure on the lot that does not 569
Item # 20.

Ordinance No. ___

present a threat to the public health and safety and that is not affected by the construction of the AD
U or JADU.

2. Unpermitted ADUs constructed before 2018.

Permit to Legalize. As required by state law, the
C
ity may not deny a permit to
legalize an existing but unpermitted ADU that was constructed before January 1, 2018, if denial is based on either o
f the following grounds:

The ADU violates applicable building standards, or

ii.

The ADU does not comply with Government Code section 65852.2

(State
ADU law
) or this ADU ordinance (
MMC Section XI
-
10 -

13.08 ).

Exceptions:

Notwithstanding
Subsection XI
-
10 -

13.08 (H)(2)(a)
above, the
C
ity may deny
a permit to legalize an existing but unpermitted ADU that was constructed before January 1, 2018, if the
Building Official

makes a finding that
correcting a violation is necessary to
protect the health and safety of the
public or of occupants of the structure.

ii
.

Subsection XI
-
10 -

13.08 (H)(2)(a)
above does not apply to a building that is
deemed to be substandard in accordance with California Health and Safety Code section 17920.3.

K
I
.

Nonconforming ADUs and Discretionary Approval. Any proposed ADU or JADU that does not conform to the objective standards set forth in Subsections XI -
10 -

13.08(A) through (H)
may be allowed by the City with a Minor Site Development Permit, in accordance with

Section XI
-
10 -
57 "Applications".

SECTION 5.

SEVERABILITY

The provisions of this Ordinance are separable, and the invalidity of any phrase, clause, provision, or part has no effect on the validity of the remainder.

SECTION 6.

EFFECTIVE DATE AND

POSTING

In accordance with Section 36937 of the Government Code of the State of California, this Ordinance takes effect 30 days from the date of its passage. The City Council hereby directs the City Clerk to cause this Ordinance or a summary thereof to be

published in accordance with
Section 36933 of the Government Code of the State of California.

SECTION 7
.

SUBMISSION TO HCD

The City Clerk shall submit a copy of this Ordinance to the Department of Housing and Community Development within 60 days after ad
option.

570
Item # 20.

Ordinance No. ___

571
Item # 20.

RESOLUTION NO. 22-027

A RESOLUTION OF THE PLANNING COMMISSION OF THE CITY OF MILPITAS

RECOMMENDING THAT THE CITY COUNCIL APPROVE ZONING TEXT
AMENDMENT ZA22-0007 AMENDING SECTION 13 “SPECIAL USES” OF CHAPTER 10 “ZONING” OF TITLE XI OF THE MILPITAS MUNICIPAL CODE RELATING TO

ACCESSORY DWELLING UNITS, AND DETERMINING THE AMENDMENT TO BE

EXEMPT FROM THE CALIFORNIA ENVIRONMENTAL QUALITY ACT (CEQA)

WHEREAS, the City of Milpitas, California (the “City”) is a municipal corporation, duly organized under the constitution and laws of the State of California; and

WHEREAS, the Planning and Zoning Law authorizes cities to act by ordinance to provide for the creation and regulatio n of accessory dwellin g units (“ADUs”) and junior accessory dwelling units (“JADUs”); and

WHEREAS, in September and October of 2022, the California Legislature approved, and the Governor signed into law, Assembly Bill 2221 and Senate Bill 897 (“2022 ADU Laws”), which among other things, amended Government Code sections 65852.2, 65852.22, and 65852.23 to impose new limits on local authority to regulate ADUs and JADUs; and

WHEREAS, the 2022 ADU Laws take effect January 1, 2023, and preempt any conflicting City ordinance; and

WHEREAS, State law requires consistency betwee n local regulations for ADUs and JADUs and the state ADU la w, so the City must amend the current provisions of Milpitas Municipal Code Section XI-10-13.08 (“Accessory Dwelling Units”) to comply with the new provisions of the 2022 ADU Laws; and
WHEREAS, the City desires to amend existing provisions in Milpitas Municipal Code section XI -10-13.08 related to the regulation of ADUs and JADUs to comply with the 2022 ADU Laws; and

WHEREAS, there is a current and immediate threat to the public health, safety, or welfare based on the passage of AB2221 and SB897 because if the City does not amend its local Zoning Ordinance for consistency with state ADU law, all of the City’s ADU and JADU regulations may be nullified, and the City would thereafter be limited to applying on ly those few default standards that are provided in Government Code sections 65852.2, 65852.22, and 65852.23; and

WHEREAS, the approval of ADUs and JADUs based solely on the default statutory standards, without local regulations governing height, setback, landscape, architectural review, among other things, may threaten the character of existing neighborhoods, and negatively impact property values, personal privacy, and fire safety; and

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Resolution No. 22-027 Page 2
WHEREAS, Planning Department staff prepared the proposed ordinance, including t he proposed language and terminology, and any additional information and documents deemed necessary; and

WHEREAS, the City has prepared Zoning Amendment No. ZA22-0007 (“Amendment”) to the City’s Municipal Code, includi ng modifications and refinements to Section XI-10-13.08 (“Accessory Dwelling Units”); and

WHEREAS, as separate and independent bases, the Planning Commission hereby finds and determines that the project is exempt from further CEQA re view pursuant to CEQA Guidelines section 15282(h) (the adoption of an o rdinance regarding second units in a single- family or multifamily residential zone by a city or county to implement the provisions of Sections 65852.1 and 65852.2 of the Government Code as set forth in Section 21080 .17 of the Public Resources Code); and

WHEREAS, the Planning Commission makes and accepts as its own the findings s et forth in this Resolution; and

WHEREAS, the Planning Commission is an advisory body to the City Council; and

WHEREAS, on November 9, 2022, the Planning Commission held a duly noticed public hearing on the subject Amendment, at which all those in attendance were given the opportunity to speak on the Zoning Text Amendment; and

WHEREAS, the Planning Commission has considered all the written and oral testimony presented at the public hearing in making its decision.

NOW THEREFORE , the Planning Commission of the City of Milpitas hereby finds, determines and resolves as follows:

SECTION 1. Recitals

The Planning Commission has duly considered t he full recor d before it, whi ch may include but is not limited to such things as the City staff report, testimony by staff and the public, and other materials and evidence submitted or provided to the Planning C ommission.

Furthermore, the recitals set for th above are found to be true and correct and are incorporated herein by reference.

SECTION 2. CEQA Finding

The Planning Commission recommends that the City Council find , under CEQA Guidelines, Section 15 282(h), that if this Ordinance is a project, it is nonetheless exempt from further environmental review because it is the adoption of an o rdinance regarding second units in a single-family or multifamily residential zone by a city or county to implement the provisions of Sections 65852.1 and 65852.2 of the Government Code as set fo rth in Section 21080.17 of the Public Resources Code.

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Resolution No. 22-027 Page 3
SECTION 3. Findings for Zoning Amendment

In accordance with Subsection XI -10-57.02(G)(3) of the Milpitas Munici pal Code, t he Planning Commission makes the following findings based on the evidence in the public record in support of Zoning Text Amendment No. ZA22-0007:

1. The proposed amendment is consistent with the General Plan.

The proposed zoning amendmen ts are consistent with the Milpitas General Plan.

Specifically, the amendments implement policy 1 -4 of the Land Use Element and policy 4 -1 of the Community Health and Wellness Element, which speak to the need to provide a variety of housing types suited to a range of household types (e.g. , individuals, families) and income levels and creating housing in close proximity to public transportation. The zoning amendments would also help to realize the intent of Goals C and D of the Housing Element, which call fo r the City to facilitate new housing production a nd support diversity and affordability in Milpitas’ housing stock. Adoption of the proposed amendments to the Zoning Ordinance would make it easier, faster, and more cost -efficient for property owners to cre ate ADUs and JADUs, which are typically smaller h ousing unit types tha t tend to be inherently more affordable.

In addition, consistent with Government Code Section 65852.2(a)(1)(C), the proposed zoning amendments include a provision stating that ADUs and JADUs are a r esidential use that is consistent with the existing General Plan designation for the subject property.

2. The proposed amendment will not adversely affect the public health, safety and welfare.

The proposed zoning amendments refine the streamlined review procedures and standards for ADUs and JADUs to ensu re that future units are compatible w ith surrounding sing le-family residential uses and avoid potential impacts (e.g. , to privacy and solar access) on adjacent properties. In this respect , the amendments will serve to protect neighborhood character and property owner rights, thereby maintaining the public health, safety, and welfare.

SECTION 4: Urgency Findings

The Plan ning Commission finds that notwithstanding the findings noted above, it is appropriate to recommend that the City Council adopt the proposed Ordinance as an urgency measure pursuant to Government Code Section 36937 for the immediate preservation of the public peace, health and safety . If the City does not amend its local Zoning Ordinance for consistency with state ADU law, all of the City’s existing ADU and JADU regulations m ay be deemed null and void . The City would thereafter be limited to applying on ly those few default standards that are provided in Government Code sections 65852.2, 65852.22, and 65852.23, and the approval of ADUs and JADUs bas ed solely on the default state statutory standards, without local regulations governing height, setback, landscape, architectural review, among other things, may threaten the character of existing neighborhoods, and negatively impact property values, personal privacy, and fire safety.

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Resolution No. 22-027 Page 4

SECTION 5: Planning Commission Action

The Planning Commission of the City of Milpitas hereby adopts Resolution No. 22-027 recommending that the City Council a dopt an Urgenc y Ordinance approving Zoning Text Amendment ZA22-0007 based on the above Findings.

PASSED AND ADOPTED at a regular meeting of the Planning Commission of the City of Milpitas on November 9, 2022.

Chair

TO WIT:

I HEREBY CERTIFY that the following resolution was duly adopted at a regula r meeting o f the Planning Commission of the City of Milp itas on November 9, 2022 and carried by the following roll call vote:

COMMISSIONER AYES NOES ABSENT ABSTAIN
Mercedes Albana
Dipak Awasthi
Lawrence Ciardella
Bill Chuan
Alexander Galang
Sonia Medina-Ashby
Zeha Mohsin

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575
Item # 20.

CITY OF MILPITAS

AGENDA REPORT
(AR)

Item Title: Conduct a Public Hearing and Introduce an Ordinance Amending Section 13 “Special Uses” of Chapter 10 “Zoning” of Title XI of the Milpitas Municipal Code Relating to Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs) (Staff Contact: Ned Thomas, Planning Director, 408-586-3273) Category: Public Hearings-Community Development
Meeting Date: 12/6/2022
Recommendations:
(1) Conduct a public hearing and move to close the hearing following comments. (2) City Attorney shall read aloud the title of the Ordinance. (3) Move to waive the first reading beyond the title and introduce an Ordinance amending Section 13 “Special Uses” of Chapter 10 “Zoning” of Title XI of the Milpitas Municipal Code relating to Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs) and making findings of CEQA exemption.

Background:

The State Planning and Zoning Law authorizes a local agency, by ordinance or ministerial approval, to provide for the creation of accessory dwelling units in areas zoned for residential use. Existing law authorizes a local agency to impose standards on accessory dwelling units that include, but are not limited to, parking, height, setback, landscape, architectural review, and maximum size of a unit.

In September and October 2 022, the California Legislature approved, and the Governor signed into law, Assembly Bill 2221 (AB 2221) and Senate Bill 897 (SB 897) that, among other things, amended sections 65852.2, 65852.22, and 65852.23 of the Government Code and section 17980.12 of the Health and Safety Code to limit local authority and streamline the approval process for ADUs and JADUs.

State law requires consistency between local regulations for ADUs and JADUs and the state ADU law, so the City must amend its ADU Ordinance to comply with the new provisions of AB 2221 and SB 897. Failure to do so by January 1, 2023, would render the City’s local ADU Ordinance null and void.

Overview of Draft Ordinance:

In accordance with recent changes to state law under AB 2221 and SB 897, the proposed urgency ordinance would amend Title XI “Zoning, Planning and Annexations,” Chapter 10 “Zoning,” Section 13 “Special Uses,” Subsection 8 “Accessory Dwelling Units” of the Milpitas Municipal Code in the following ways:

• Increases the maximum allowable height of a detached ADU from 16 feet to 18 feet if the ADU is created on a lot with an existing or proposed single-family or multi-family dwelling unit located within ½-mile walking distance of a major transit stop or a high-quality transit corridor. • Requires that a detached ADU up to 18 feet in height is subject to ministerial approval. • Requires that a detached ADU may be up to two additional feet in height (for a maximum of 20 feet) if needed to accommodate a roof pitch on the ADU aligned with the roof pitch of the primary dwelling. 576
Item # 21.

• Increases the maximum allowable height for an attached ADU to 25 feet or the height limitation imposed by the underlying zone that applied to the primary dwelling, whichever is lower. The ADU height may not exceed two stories. Height measured from legal grade to peak of the structure. • Requires an attached ADU up to 25 feet in height is subject to ministerial approval. • Requires that the construction of an ADU does not constitute a Group R occupancy change under the local building code, except as specified. The ordinance would prohibit the construction of an ADU from triggering a requirement that fire sprinklers be installed in the existing primary dwelling. • Prohibits the City from requiring modifications to the primary unit when an ADU is added to an existing multi- family dwelling that exceeds applicable height requirements or has a rear or side setback of less than 4 feet. • Requires a minimum 20-foot front-yard setback for all ADUs, unless such setback precludes an 800-square- foot ADU from being developed.
• Prohibits the City from imposing any parking standards on an ADU that is included in an application to create a new single -family dwelling unit or a new multi -family dwelling on the same lot, provid ed that the ADU meets other specified requirements.
• Requires enclosed uses within the proposed or existing single-family residence, such as attached garages, to be considered a part of the proposed or existing single-family residence. • Requires a JADU that does not include a separate bathroom to include a separate entrance from the main entrance to the structure, with an interior entry to the main living area. • Prohibits the City from denying an application for a JADU permit due to the correction of n onconforming zoning conditions, building code violations, or unpermitted structures that do not threaten public health and safety and are not in conflict with JADU construction.
• Prohibits denial of a permit to legalize an unpermitted ADU that was constructed before January 1, 2018, because, among other things, the unit violates building standards or state or local standards applicable to ADUs, unless the local agency makes a finding that correcting the violation is necessary to protect the health and safety of the public or occupants of the structure. This prohibition does not apply to structures deemed substandard under state law.
• Prohibits denial of a permit application to crea te a new ADU or JADU based on the need for correction of nonconforming zoning conditions, building code violations, or unpermitted structures that do not present a threat to public health and safety and are not affected by the construction of the accessory dwelling unit. • Requires the City to return a full set of written comments to the applicant with a list of defective or deficient items and a description of how the applicant can remedy the application if the permitting agency denies an application for an ADU or JADU.
• Requires the City to review and issue a demolition permit for a detached garage that is to be replaced by an ADU concurrent with its review and issuance the permit for the ADU. • In addition to the required changes outlined above to ensure consistency with current state ADU law, the proposed zoning amendment also makes other organizational and formatting changes to the City’s ADU Ordinance to clarify standards and facilitate streamlined approval of ADUs and JADUs.

577
Item # 21.

General Plan Conformance
As outlined in Table 1 below, the proposed zoning text amendments for ADUs and JADUs conform to the policies and standards in the City’s General Plan.

Table 1: General Plan Consistency

Policy/Goals Conformance
Land Use Element
Policy - Land Use 1-4:

Continue to provide a variety of housing types
and densities that meet the needs of individuals
and families and offer sufficient housing
opportunities and choices to Milpitas residents of
all income levels, age groups, and special needs.

Consistent. The zoning text amendments modify the
ADU and JADU regulations to streamline and
encourage the production of these housing unit types,
which add diversity to the City’s housing stock in terms of unit size and cost. ADUs and JADUs offer new
housing options tha t help meet the needs of various
household sizes, income levels, and ages.

Community Health and Wellness Element
Policy – Land Use 6-2:

Ensure that there is a diversity of housing types
to accommodate all income levels and provide
housing for very low and extremely low-income
populations in areas with high accessibility to
public transportation.

Consistent. The proposed ordinance enacts changes
to zoning regulations for a specific type of residential development to increase the variety of housing types.

By increasing height and configuration requirements
and modifying parking and setback requirements, the
City is adding greater flexibility for homeowners to
develop ADUs and JADUs, potentially increasing the
availability and diversity of housing types.

Housing Element - Goal C:

Facilitate New Housing Production
Consistent. The zoning text amendments modify the
ADU regulations to comply with new state laws intended
to reduce barriers to the creation of ADUs and JADUs.

The ministerial approval process and objective
standards simplify and facilitate new housing production in residential neighborhoods.

Housing Element – Goal D
Support Housing Diversity and Affordability.

Consistent. The zoning text amendments modify the
City’s ADU and JADU regulations and encourage the
production of additional housing that is available and
appropriate to different household sizes and income
levels. ADUs and JADUs are smaller than single-family
residences and more affordable than condominiums.

FINDINGS FOR APPROVAL
The City Council shall consider the following findings in considering approval of a zoning ordinance amendment:

Zoning Amendment (Section XI-10-57.02(G)(3))

1. The proposed amendment is consistent with the General Plan.

The proposed amendment is consistent with the Milpitas General Plan, as shown in Table 1.

2. The proposed amendment will not adversely affect the public health, safety, and welfare.

The proposed zoning amendments will increase the maximum allowable height of ADUs, clarify setbacks and ADU design requirements, remove barriers to the legalization of existing ADUs , and simplify the review and approval process for new ADUs and JADUs. These changes can be implemented without adversely affecting public health, safety, or welfare. 578 Item # 21.

Policy Alternative(s):

Alternative: Do not amend Section XI-10-13.08 (“Accessory Dwelling Units”) and defer to State law.

Pros: Consistent with State law.

Cons: Potential negative impacts to neighborhoods.

Reason for Not Recommending: If the City does not amend its code to conform to current State law, State law makes the City’s ADU regulations null and void. The City will have no ability to regulate ADUs beyond the few minimal standards imposed by State law.

Fiscal Impact:

The proposed zoning ordinance amendment makes minor changes to the City’s local regulations for creation of Accessory Dwelling Units (ADUs) to ensure consistency with recent state legislative changes to state ADU law.

The changes clarify existing regulations and will have no fiscal impact.

California Environmental Quality Act (CEQA):

Under California Public Resources Code Section 21080.17, CEQA does not apply to the adoption of an ordinance by a local government implementing the provisions of Section 65852.2 of the Government Code, which is California’s law regulating ADUs and JADUs, as defined by Government Code Section 65852.22.

Therefore, the proposed ordinance is statutorily exempt from CEQA in that the proposed ordinance implements the State’s ADU law. In addition, the ordinance is statutorily exempt pursuant to CEQA Guidelines Section 15282(h) (adoption of an ordinance regarding second units in a single- or multi-family residential zone).

Planning Commission Recommendation:

The Planning Commission considered the proposed zoning text amendment at its regularly scheduled public meeting on November 9, 2022. Following discussion and public comment, the Planning Commission voted unanimously (7-0) to recommend that the City Council adopt the urgency ordinance related to updating the City’s regulations and requirements for ADUs and JADUs for consistency with recent changes to the state ADU law .

The Commission’s resolution in favor of adopting the proposed ordinance is attached (Attachment B).

Recommendation:
1) Conduct a public hearing and move to close the hearing following comments. 2) City Attorney shall read aloud title of the Ordinance. 3) Move to waive the first reading beyond title and introduce an Ordinance amending Section 13 “Special Uses” of Chapter 10 “Zoning” of Title XI of the Milpitas Municipal Code relating to Accessory Dwelling Units (ADUs) and Junior Accessory Dwelling Units (JADUs) and making findings of CEQA exemption. .

Attachments:

A) Draft Ordinance – for Introduction
B) Exhibit A to Draft Ordinance
C) Planning Commission Resolution No. 22-028

579
Item # 21.

Ordinance No. ___

REGULAR
NUMBER: ___.__
TITLE: AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF MILPITAS AMENDING SECTION 13 (“SPECIAL USES”) OF CHAPTER 10 (“ZONING”) OF TITLE XI OF THE

MILPITAS MUNICIPAL CODE RELATING TO ACCESSORY DWELLING UNITS ,

AND MAKING FINDINGS OF CEQA EXEMPTION
HISTORY: This Ordinance was introduced (first reading) by the City Council at its meeting of ____________________, upon motion by_______ __________________ and was adopted (second reading) by the City Council at its meeting of _______________, upon motion by ____________________________. The Ordinance was duly passed and ordered published in accordance with law by the following vote:

AYES:

NOES:

ABSENT:

ABSTAIN:

ATTEST: APPROVED:

________________________________ __________________________ Suzanne Guzzetta, City Clerk Rich Tran, Mayor

APPROVED AS TO FORM:

________________________________
Michael Mutalipassi, City Attorney
580
Item # 21.

Ordinance No. ___
RECITALS AND FINDINGS:

WHEREAS, the City of Milpitas, California (the “City”) is a municipal corporation, duly organized under the constitution and laws of the State of California; and WHEREAS, the Planning and Zoning Law authorizes cities to act by ordinance to provide for the creation and regulation of accessory dwelling units (“ADUs”) and junior accessory dwelling units (“JADUs”); and WHEREAS, in September and October of 2022, the California Legislature approved, and the Governor signed into l aw, Assembly Bill 2221 and Senate Bill 897 (“2022 ADU Laws”) , which among other things, amended Government Code sections 65852.2, 65852.22, and 65852.23 to impose new limits on local authority to regulate ADUs and JADUs; and
WHEREAS, the City desires to amend existing provisions in Milpitas Municipal Code section XI -10-

13.08 related to the regulation of ADUs and JADUs to comply with the 2022 ADU Laws; and WHEREAS, Planning Department staff prepared the proposed ordinance, including the proposed language and terminology, and any additional information and documents deemed necessary; and WHEREAS, the City has prepared Zoning Amendment No. ZA2 2-0007 (“Amendment”) to modify the City’s Municipal Code, including additions, deletions, and refinements to Section XI-10-13.08 (“Accessory Dwelling Units”); and
WHEREAS, on November 9, 2022 , the Planning Commission for the City of Milpitas held a lawfully noticed public hearing to solicit public comment and consider the proposed Amendment, take public testimony, and make a recommendation to the City Council on the project.

NOW, THEREFORE, the City Council of the City of Milpitas does ordain as follows:

SECTION 1. RECORD AND BASIS FOR ACTION
The City Council has duly considered the full record before it, which may include but is not limited to such things as the City staff report, testimony by staff and the public, and other materials and evidence submitted or provided to the City Council. Furthermore, the recitals set forth above are found to be true and correct and are incorporated herein by reference.

SECTION 2. CALIFORNIA ENVIRONMENTAL QUALITY ACT
Under Public Resources Code section 21080.17, the adoption of an ordinance by a city or coun ty implementing the provisions of Government Code sections 65852.1 or 65852.2 and regulating the creation of ADUs and JADUs is statutorily exempt from the requirements of the California Environmental Quality Act (“CEQA”). The Ordinance implements Government Code section 65852.2 and is therefore statutorily exempt.

SECTION 3. GENERAL PLAN CONSISTENCY
State law requires the City to deem accessory dwelling units, as permitted by this Ordinance, to be “a residential use that is consistent with the exis ting general plan and zoning designation.” (California Government Code §65852.2(a)(1)(C).) Furthermore, the City Council has considered the Planning Commission staff report, which provides a robust analysis demonstrating that this Ordinance is consistent w ith the General Plan. Therefore, the Council deems this Ordinance to be consistent with the General Plan both in substance and as a matter of law.

SECTION 4. AMENDMENT OF MILPITAS MUNICIPAL CODE TITLE XI, CHAPTER 10 581
Item # 21.

Ordinance No. ___
Section 13 (“Special Uses”) Chapters 10 (“Zoning”) of Title XI of the Milpitas Municipal Code is hereby amended and restated as provided in Exhibit “A”, attached hereto and incorporated herein by reference.

SECTION 5. EFFECTIVE DATE AND POSTING
In accordance with Section 36937 of the Government Code of the State of California, this Ordinance takes effect 30 days from the date of its passage. The City Council hereby directs the City Clerk to cause this Ordinance or a summary thereof to be published in accordance with Section 36933 of t he Government Code of the State of California.

SECTION 6. CERTIFICATION

The City Clerk shall either: (a) have this ordinance published in a newspaper of general circulation within 15 days after its adoption, or; (b) have a summary of this ordinance published twice in a newspaper of general circulation, once five days before its adoption and again within 15 days after its adoption.

SECTION 7. SEVERABILITY
If any section, subsection, subdivision, sentence, clause, phrase, or portion of this Ordinance, or the application thereof to any person or place, is for any reason held to be invalid or unconstitutional by a court of competent jurisdiction, such decision shall not affect the validity of the remainder of this Ordinance. The City Council hereby declares that it would have adopted this Ordinance, and each and every section, subsection, subdivision, sentence, clause, phrase, or portion thereof, irrespective of the fact that any one or more sections, subsections, subdivisions, sentences, clauses, phrases, or portions thereof be declared invalid or unconstitutional.

SECTION 8. NOTICE OF CEQA EXEMPTION
The City Council hereby directs staff to prepare, execute, and file with the County of Santa Clara Clerk a notice of CEQA exemption within five (5) working days of the adoption of this Ordinance.

SECTION 9. SUBMISSION TO HCD
The City Clerk shall submit a copy of this Ordinance to the Department of Housing and Community Development within 60 days after adoption.

582
Item # 21.

Ordinance No. ___

EXHIBIT A
Amendments to Section 13 of Chapter 10 of Title XI of the Milpitas Municipal Code (follows this page)

583
Item # 21.

Ordinance No. ___

EXHIBIT A

AMENDMENT OF MILPITAS MUNICIPAL CODE TITLE XI, CHAPTER 10, SECTION 13

Title XI, Chapter 10, Section 13 “Special Uses”, Subsection 8 “Accessory Dwelling Units” of the Milpitas Municipal Code is hereby amended to read as follows:

Purpose and Intent. The purpose of these standards is to allow and regulate accessory dwelling

units (hereinafter referred to as ADUs) and junior accessory dwelling units (hereinafter referred to as JADUs) in compliance comply with Government Code Sections 65852.2 and 65852.22.

Effect of Conforming. An ADU or JADU that conforms to the standards

in this section
shall:

1. Be deemed

to be

consistent with the City's general plan and zoning designation for the lot on which the
unit
ADU or JADU

is located.

2. Not be deemed to exceed the allowable density for the lot on which the unit
ADU or
JADU

is lo
cated.

3. Not be considered in the application of any local ordinance, policy, or program to limit residential growth.

4. Not be required to correct a "nonconforming zoning condition .
"

as defined in

Subsection XI
-
10 -

13.08 (
C
)(
10 )

below. This does not prev
ent the
C
ity from enforc
ing
compliance with applicable building safety standards in accordance with Health and Safety Code section 17980.12.

Definitions.

1. Accessory Dwelling Unit

o
r

ADU
: As defined by Government Code Section 65852.2,
an ADU is an
attached or a detached residential dwelling unit that provides complete independent living facilities for one or more persons
, including permanent provisions
for living, sleeping, eating, cooking, and sanitation

and is located on a lot with a
proposed or e
x
isting primary residence
. An ADU also includes an efficiency unit as
defined in Section 17958.1 of the Health and Safety Code and a manufactured home as defined by Section 18007 of the Health and Safety Code.

2. Accessory Structure: For purposes of this
section, an accessory structure is a structure
that is accessory and incidental to a dwelling located on the same lot.

3. Attached Accessory Dwelling Unit: An attached ADU is an ADU that shares at least one wall with the primary dwelling.

584
Item # 21.

Ordinance No. ___

4 .

Compl
ete and

Independent Living Facilities:

P
ermanent
p
rovi
sions for

l
iving, sleeping,
eating, cooking, and sanitation
in an accessory structure located
on the same parcel as a
proposed or existing
primary
single
-
family or

multi
-
family dwelling
.

4 5
.

Detached Accessory Dwelling Unit: An ADU is detached if it does not share any walls with the primary dwelling unit or existing attached accessory structure.

5 6
.

Efficiency Kitchen: In accordance with Government Code Section 65852.22(a)(6), an efficiency k
itchen includes the following: (a) a cooking facility with appliances and (b) food
-
preparation counter space with a total area of at least 15 square feet and food -
storage cabinets with a total of at least 30 square feet of shelf space.

6 7
.

Junior Accessor
y Dwelling Unit

or JADU
: As defined by Government Code Section
65852.22, a JADU is a unit that

satisfies all the following:

a
.

The unit
is no more than 500 square feet in size
.

and

b. T
he unit

is
contained entirely within an existing or proposed single -
family structure.

c
.

A JADU may have only
The unit includes
an efficiency kitchen
,

and may include
separate sanitation facilities or may share sanitation facilities with the primary dwelling
as
defined in

Subsection X
I
-
10 -

13.08 (
C
)(
6 )

above
.

d. The unit includes separate sanitation facilities or shares sanitation facilities with the existing or proposed primary dwelling.

e. If the unit does not include separate sanitation facilities, then it includes an interior
entrance to the main living area of the existing or proposed primary dwelling in addition to an exterior entrance that is separate from the main entrance to the primary dwelling.

7 8
.

Livable Space: A space within a building designed f
or living, sleeping, eating or food
preparation, including but not limited to a den, study, library, home office, sewing room, or recreational room and excluding such areas as garages.

8 9
.

Living Area: As defined by Government Code Section 65852.2, the in terior habitable
area of a dwelling unit
,

including basements and attics
,

but not including a garage or
any accessory
building or
structure.

9 10
.

Natural Person: An individual and living human being, as opposed to a legal person which may be a private (i.
e. business entity or non
-
governmental organization) or
public (i.e. government) entity.

1 0
1 .

Nonconforming
z
Z
oning
c
C
ondition: A physical improvement on a property that does not conform with current zoning standards.

1 1
2 .

Passageway: A pathway that is unobstructed clear to the sky and extends from a street to one entrance of the ADU or JADU.

585
Item # 21.

Ordinance No. ___

1 2
3 .

Proposed
d
D
welling: A dwelling that is the subject of a permit application and that meets the requirements for permitting.

1 3
5 .

Public Transit: A location, including, but not limited to, a bus stop or train station, where the public may access buses, trains, subways, and other forms of transportation that charge set fares, run on fixed routes, and are available to the public. Exam ples
include, but are not limited to, Altamont Commuter Express (ACE), Bay Area Rapid Transit (BART), AC Transit, Valley Transportation Authority (VTA) bus service and light rail, and paratransit.

1 5
.

Tandem Parking
:

T
wo or more
vehicles

parked on a drive
way or in

a garage or

any
other location on a lot
, lined up behind one another.

D. General Provisions

1. Where permitted. An ADU may be established on any lot in any district that allows single
-
family or multi
-
family dwelling residential uses. A JADU
may be established
on any lot in any district that allows single
-
family residential uses.

2. Review Requirements. Any application for an ADU or JADU that satisfies the standards in subdivisions (A) through (J) of this section shall be approved ministeriall y
without discretionary review or public hearing.

3. An ADU or JADU shall meet or exceed the minimum floor area requirements of an efficiency unit, as defined by Section 17958.1 of the State Health and Safety Code, and so may not have a floor area that is

smaller than 220 square feet.

4. All ADUs shall comply with local building code requirements.

5. No passageway shall be required for an ADU or JADU.

6. Owner Occupancy. All JADUs are subject to an owner
-
occupancy requirement. A
natural person with l
egal or equitable title to the property must reside on the property, in either the primary dwelling or the JADU, as the person’s primary residence and legal domicile. However, the owner
-
occupancy requirement of this paragraph does not
apply if the property

is entirely owned by a governmental agency, land trust, or housing organization.

7. Sale Prohibited. No ADU or JADU may be sold or otherwise conveyed separately from the lot and the primary dwelling (in the case of a single -
family lot_ or from the
lot and

all of the dwellings (in the case of a multi
-
family lot).

8. Rental. An ADU or JADU may be rented for a term of 30 days or more. Short -
term
rental for periods of less than 30 days are not permitted.

E. Action on Application.

586
Item # 21.

Ordinance No. ___

1. The City shall act on an application to establish an ADU or JADU within 60 days from the date

the City receives a complete application, unless either:

The applicant requests a delay, in which the 60
-
day time period is tolled for the
period of the requ
ested delay, or

The application for the ADU or JADU is submitted as part of a permit application for a new single
-
family dwelling on the lot, in which case the City may delay acting on the permit application for the ADU or JADU until it acts on the per mit
application for the new single
-
family dwelling; however, the application shall still
be considered ministerially without discretionary review or a hearing.

F
D
.

ADUs and JADUs Subject to Limited Requirements

Approval Process.

The following
approvals shall apply to ADUs and JADUs under this section:

1. Specific Types of
ADUs and JADUs.

To qualify for a building permit, the following
types of ADUs and JADUs are subject only to the limited requirements that define each type.

Requiring a Building

Permit Only.

ADUs and JADUs that comply with the general
requireme
nts outlined in
Subsection XI
-
10 -

13.08 (
E
)

below shall
be allowed

with

only a
building permi
t in the following scenarios:

Converted on Single
-
family Lot: One ADU as described in this
Subsection XI
-
10 -

13.08(
F
D
)(1)(a) and one JADU are allowed on a lot with a proposed or existing single
-
family dwelling on it, where the
unit
ADU or JADU
:

Is within the space of a proposed single
-
family dwelling; within the existing
space of an existing single
-
family dwelling; or
(in the case of an ADU only)
within the existing space of an accessory structure, plus up to 150 additional square feet if the exp
ansion is limited to accommodating ingress and egress
.
;
and

ii.

Has exterior access that is independent of that for the single -
family
dwelling
.
: and

iii.

Has side and rear setbacks sufficient for fire and safety, as dictated
required
by applicable buildi
ng and fire codes.

iv.

The JADU complies with the requirements of Government Code Section 65852.22.

Limited Detached on Single
-
family Lot. One detached, new
-
construction ADU is
allowed on a lot with a proposed or existing single
-
family dwelling (in add
ition to
any JADU that might otherwise be established on the lot under Subsection XI -
10 -

13.08(
F
D
)(1)(a)), if the detached ADU satisfies the following limitations:

The side
-

and rear
-
yard setbacks are at least four feet.

ii.

The total floor area is 800 square feet or less.

587
Item # 21.

Ordinance No. ___

iii.

The
peak
height above grade

is 16 feet or less

does not exceed the applicable
height limit in
S
ubsection

XI
-
10 -

13.08(E)(3)
below
.

Converted on Multi
-
family Lot: One or more ADUs are allowed
within portions
of existing multi
-
family dwelling structures that are not used as livable space, including but not limited to storage rooms, boiler rooms, passageways, attics, basements, or garages, if each converted ADU complies with state building standa
rds for dwellings. Under this Subsection XI
-
10 -

13.08(
F
D
)(1)(c), at least
one converted ADU is allowed within an existing multifamily dwelling, up to a quantity equal to 25 percent of the number of existing multifamily dwelling units.

Limited Detached o
n Multi
-
family Lot:

Up to
No more than
two detached ADUs
are allowed on a lot that has an existing multi
-
family dwelling if each detached
ADU satisfies the following limitations:

The side
-

and rear
-
yard setbacks are at least four feet.

If the existing

multifamily dwelling

has a rear or side yard setback of less than four feet, the City will not require any modification to the multifamily dwelling as a condition of approval for the ADU.

ii.

The peak height above grade

is 16 feet or less

does not exceed the applicable
height limit provided in

S
ubsection XI
-
10 -

13.08(E)(3)

below
.

iii.

If more than one detached ADU is created, the ADUs may share a common wall.

2. Deed Restriction for JADUs. Prior to obtaining a building permit for a JADU, a deed
restriction, approved by the City Attorney, must be recorded with the County Recorder's office, which shall include the pertinent restrictions and limitations of a JADU identified in this Section. Said deed restriction shall run w ith the land and bind
all future owners, heirs, and assigns. A copy of the recorded deed restriction shall be filed with the Department stating that:

The JADU may not be sold separately from the primary dwelling unit;

The JADU is restricted to the
maximum size allowed per the development
standards;

The JADU is legal only so long as either the primary residence, or the JADU, is occupied by the owner of record of the propert
Requiring

Building Permit and a

Minor
Site Development Permit (Minor SDP)
.

Except as allowed

under

Subsection XI
-
10 -

13.08(D)(1) above,

no ADU may be
created without approval of

B
uilding
P
ermit and a

Minor SDP

in compliance
with the standards set forth in Subsections E

and F below.

The City may charge a fee to reimburse the costs incurred in processing

Minor
SDPs for ADUs
, including the costs of adopting or amending the City’s ADU 588
Item # 21.

Ordinance No. ___

Ordinance. The

additional
fee for ADUs

shall be determined by the Planning
Director and approved by the City Council by Resolution.

3 .

Timi
ng

and Process for Review

Any application for an ADU that satisfies the standards in Subsections XI
-
10 -

13.08 (E) through (F) of this section shall be
subject to ministerial approval

without discretionary review or public hearing.

The City shall act on an application to
create

an
ADU or JADU within 60 days
from the date the City receives a complete application. If the City has not acted on the complete application within 60 days, the application is deemed approved

unless either:

i
.

The applicant requests a delay, in which the
60 -
day time period is tolled for
the period of the requested delay
;

ii.

The application for the ADU or JADU is submitted as part of a permit application for a new single
-
family or multi
-
family dwelling on the lot, in
which case the City may delay actin
g on the permit application for the ADU
or JADU until it acts on the permit application to create the new single -
family dwelling; however, the application

for the ADU or JADU

shall still be
subject to ministerial approval

without discretionary review or a
hearing.

If the City denies an application to create an ADU or JADU, the City must provide the applicant with comments that include, among other things, a list of all defective or deficient items and a description of how the application may be remedied
by the applicant. Notice of the denial and corresponding comments must be provided to the applicant within the 60
-
day time period established by

Subsection XI
-
10 -

13.08 (
D)(3)(a)

above.

d
.

A demolition permit for a detached garage that is to be replaced with an ADU
shall be reviewed with the application for the ADU and issued concurrently.

E
.

General
ADU and JADU Requirements
.

The following requirements shall apply to all
ADUs and JADUs approved under
Subsection XI
-
10 -

13.08 (D)(1) and (D)(2)
above
.

1. Location and Zoning.

A
n

ADU or JADU
requiring only a building permit

under

Subsection XI
-
10 -

13.08 (D)(1)

above may be created on any lot located in any residential or mixed -
use zone.

A
n
ADU
or JADU
requiring
both
a

Minor SDP

and a
b
uilding
p
ermit under
Subsection XI
-
10 -

13.08 (D)(2)
above may be created on any lot located in any
zoning district that allows sin
gle
-
family or multi
-
family residential uses.

2. Building and Safety.

589
Item # 21.

Ordinance No. ___

Subject to

Subsection XI
-
10 -

13.08 (E)(2)(b)
below, all ADUs and JADUs shall
comply with all local building code requirements.

b
.

No change of occupancy. Construction of an ADU does not constitute a Group R occupancy change under the local building code, as described in Section 310 of the California

Building Code, unless the
B
uilding
O
fficial or Code Enforcement
Division
O
fficer makes a written finding based on substantial evidence in the record that the construction of the ADU could have a specific, adverse impact on public health and safety. Nothin
g in this
Subsection XI
-
10 -

13.08 (E)(2)(
b
)
prevents the City from changing the occupancy code of a space that was non
-
habitable space or that was only permitted for nonresidential use and was subsequently converted for residential use in accordance with thi s section.

Fire sprinklers.

i. Fire sprinklers are required in an ADU or JADU if sprinklers are required in the primary residence.

ii. The construction of an ADU or JADU does not trigger a requirement for fire sprinklers to be installed in the existing primary dwelling.

3. Max
imum Height.

Except as otherwise provided by
Subsections XI
-
10 -

13.08 (E)(3)(b) and (E)(3)(c)
below, a deta
ched ADU created on a lot with an existing or proposed single family or multifamily dwelling unit
shall

not exceed 16 feet in height.

A detached ADU may be up to 18 feet in height
when located

on a lot with an
existing or proposed single
-
family or multifamily unit that is located within one
-
half mile walking distance of a major transit stop or a high quality transit corridor, as those terms are defined in Section 21155 of the Public Resources C ode
.

A detached

ADU may be up to two additional feet in height (for a maximum of 20 feet) if ne
eded

to accommodate a roof pitch on the ADU that

is aligned

with the
roof pitch of the primary dwelling unit.

d
.

A detached ADU created on a lot with an exi
sting or proposed multifamily
dwelling that has more than one story above grade

shall

not exceed 18 feet in
height.

e
.

An
attached
ADU

shall

not exceed 25 feet in height or the height limitation
imposed by the

standards for the underlying zoning district
, whichever is

less
.

Notwithstanding the foregoing, ADUs subject to this

Subsection XI
-
10 -

13.08 (E)(3)(d) shall

not exceed two stories.

f
.

For purposes of this

Subsection XI
-
10 -

13.08 (E)(3),
height is measured
fro
m the
finished

grade to the peak of the structure.

590
Item # 21.

Ordinance No. ___

4. Owner Occupancy.

An ADU that is permitted after January 1, 2020, but before January 1, 2025, shall not be subject to any owner
-
occupancy requirement.

Unless applicable law requires
otherwise, a
ll
ADUs permitted on or after January
1, 2025
shall be

subject to an owner
-
occupancy requirement. A natural person
with legal or equitable title to the property must reside on the property as the person’s legal domicile

and permanent residence
.

As required by state law, all JADUs
shall be

subject to an owner
-
occupancy
requirement. A natural person with legal or equitable title to the property must reside on the property, in either the primary dwelling or JADU, as the person’s legal domicile and permanent residence. However, the owner -
occup
ancy
requirement in this

Subsection XI
-
10 -

13.08 (E)(4)(c) shall

not apply if the
property is entirely owned by another governmental agency, land trust, or housing organization.

5 .

No Separate Conveyance.

An ADU or JADU may be rented, but, except as otherwis
e
provided in Government Code Section 65852.26, no ADU or JADU may be sold or otherwise conveyed separately from the lot and the primary dwelling (in the case of a single
-
family lot) or from the lot and all the dwellings (in the case of a multifamily lot).

6 .

No Short
-
T
erm Rental. No ADU or JADU may be rented for a term that is shorter than 30 days. This prohibition applies regardless of when the ADU or JADU was created.

7 .

Deed Restriction.

Prior to issuance of a building permit for a
n ADU or

JADU, a deed
restriction
,

in a form

approved by the City Attorney,

shall

be recorded against the title
of the property in the County Recorder’s office and a copy filed with the Planning
Department
. The deed restriction

shall

run with the land and bind all

future owners
,
heirs, and assigns
. The deed restriction

shall provide

th
at
:

Except as otherwise provided in Government Code Section 65852.26, the ADU or JADU may not be sold separately from the primary dwelling ;

The
ADU or
JADU is restricted to the
approved

size
and other

development
standards
established in this

S
ection
;

The JADU is legal only so long as either the primary residence or the JADU is occupied by the owner of record of the property
;

The ADU or JADU shall not
be used as a short
-
term rental of less than 30 days
;

The deed restriction runs with the land and may be enforced against future property owner
(
s
)
;

The deed restriction may be removed if the property owner eliminates the ADU or JADU. To remove the deed restriction, an owner shall make a written request to 591
Item # 21.

Ordinance No. ___

the Planning Director and provide evidence that the ADU or JADU has been eliminated. The Director

shall then
decide

whether the evidence supports the
claim. The Director’s determination may be appealed to the City Council.

The deed restriction is enforceable by the City, and failure to comply with the deed restriction may result in legal action aga
inst the property owner.

8. Income Reporting. In order to facilitate the
C
ity’s obligation to identify adequate sites
for housing in accordance with Government Code sections 65583.1 and 65852.2, the following requirements must be satisfied:

With the bui
lding
-
permit application, the applicant must provide the city with an estimate of the projected annualized rent that will be charged for the ADU or JADU.

F
.

ADUs Subject to Additional Objective
Specific ADU

Requirements. The following specific
standards shall apply only to ADUs that require a

minor Site Development Permit

under
Subsection XI
-
10 -

13.08 (D)(2) above
.

1. Review Requirements. A proposed ADU that does not conform to the standards set forth in Subsection XI
-
10 -

13.08 (F)(1) and (F)(2) only requires a building permit if it complies with all of the objective standards set forth in Subsection XI -
10 -

13.08(G)(2)
be
low.

2. Specific Standards.

a
1 .

Maximum Size.

i
a
.

The maximum size of an attached or detached ADU
on a property not located in
the "H" Hillside Combining District
subject to this S
ubsection
XI
-
10 -

13.08(
F
)

is
850 square feet for a studio or one
-
bedroom uni
t and 1,000 square feet for a two
-
bedroom unit.

These standards shall not apply to properties located in the “H” Hillside Combining District.

ii
b
.

The maximum size of an attached or detached ADU on a property located in the "H" Hillside Combining Distric
t is 1,200 square feet.

iii
c
.

The maximum size of an attached ADU that is created on a lot with an existing primary dwelling is further limited to 50 percent of the floor area of existing primary dwelling. No application of the percent
-
based size
limit in this paragraph

or of a

floor area ratio (FAR)
, front setback, lot coverage limit, or open
-
space
requirement

may require the ADU to be less than 800 square feet.

d
.

No ADU subject to this
Subsection XI
-
10 -

13.08 (F) may cause the total FAR of
the lot

to exceed 0.45, subject to
Subsection XI
-
10 -

13.08 (F)(1)(c) above.

Maximum Height.

592
Item # 21.

Ordinance No. ___

For properties not located in the "H" Hillside Combining District, a single -
story attached or detached ADU may not exceed 16 feet in height above grade. A two
-
story attached or detached ADU may not exceed 28 feet in height above grade.

ii.

For properties
located in the "H" Hillside Combining District, an attached or detached ADU on the west side of the crestline may not exceed a height of 17 feet in height and one story from the lowest finished grade to the highest ridgeline of the building. On the east si
de of the crestline, a detached or
attached ADU may not exceed a height of 27 feet and two stories from the lowest finished grade to the highest ridgeline of the building.

c
2 .

Minimum Setbacks.

i
a
.

Except for ADUs located in the R1
-
H zoning district, th
e minimum front yard
setback requirement an attached ADU is 4 feet. In the R1 -
H zoning district, the
minimum front yard setback for attached ADUs must be a minimum of 25 feet when the average slope of the lot is less than sixteen 16 percent, or when the fr ont
yard slope does not exceed 16 percent; otherwise, the minimum front yard setback must be 40 feet.

An ADU that is subject to this Subsection XI
-
10 -

13.08(F) must
conform to a 25
-
foot
minimum
front
-
yard setback, subject to Subsection
XI
-
10 -

13.08(F)(1)
(
c
) a
bove.

ii
b
.

An ADU that is subject to
this
Subsection XI
-
10 -

13.08 (G)(2)
(F)

must conform to
minimum
4 -
foot side
-

and rear
-
yard setbacks.

iii
c
.

No setback is required for an ADU that is subject to Subsection XI -
10 -

13.08 (G)(2)
(F)

if the ADU is constructed in the same location and to the same dimensions as an

existing structure.

An attached ADU shall have a separate entrance from the primary dwelling.

e
3 .

Building Separation.

A detached ADU shall be located at least six feet from the rear wall of the primary dwelling unit.

4. Lot Coverage. No ADU subject to this Subsection XI
-
10 -

13.08(F) may cause the total
lot coverage of the lot to exceed 50 percent,
subject to Subsection
XI
-
10 -

13.08(F)(1)
(
c
)
above
.

5. Minimum Open Space. No ADU subject to this Subsection XI -
10 -

13.08(F) may cause
the total percentage of open space of the lot to
b
e less than

50 percent, subject to
Subsection XI
-
10 -

13.08(F)(1)(c) above.

6 .

Passageway.

No passageway
is required for an ADU.

f
7 .

Parking.

593
Item # 21.

Ordinance No. ___

For each ADU
a.

Generally
, one off
-
street parking space is required
for each
ADU
unless one

or more

of the following conditions is met:

i
.

(1).

The ADU is located within one
-
half mile walking distance of
public transit.

ii.

(2) .

The ADU is located within an architecturally and historically significant historic district.

iii.

(3).

The ADU is part of a
n

existing primary residence or an

accessory

structure (i.e., it is a converted ADU under Subsection XI -
10 -

13.08(
F
D
)(1)(a) above).

iv.

(4).

On
-
street parking permits are required but not offered to the occupant of the ADU.

(5).

An established car share vehicle stop is located within one block of the ADU.

vi.

When the permit application to create an ADU is submitted with an application to create a new single
-
family or new multifamily dwelling on the
same lot, provided that the ADU or the lot satisfies any other criteria listed in Subsections (F)(7)(
a
)(i) through (v) above.

ii
b
.

No off
-
street parking is required for a
JADU, except as required under

paragraph
iv

Subsection XI
-
10 -

13.08(F)(5)(d)
below.

iii
c
.

If a parking space is required for an ADU, the space may be located within any setback area, in a tandem configuration, or on a mechanical lift. Each unenclosed parki
ng space shall be at least 8½ feet wide and 18 feet long. Each parking space that is provided in an enclosed garage shall be at least 10 feet wide and 20 feet long.

iv
d
.

When a garage, carport, or covered parking structure is converted to an ADU or demoli
shed in conjunction with the construction of an ADU, the off -
street parking
space or spaces are not required to be replaced.

If the parking structure is
converted to a JADU, the lost off
-
street parking spaces must be replaced.

g
8 .

Architectural
Design Stan
dards.

i
a
.

The
architectural style, exterior materials, and color palette of materials and
colors of the exterior walls, roof, and windows and doors

an ADU or JADU shall
match the appearance of the existing or proposed primary dwelling.

b
.

The roof slope
shall

match that of the dominant roof slope of the primary
dwelling. The dominant roof slope is the slope
of

the largest portion of the roof.

594
Item # 21.

Ordinance No. ___

ii
c
.

ADU
or JADU
shall have an independent exterior entrance
, separate
from that
of the
primary dwelling.

The entrance to an attached ADU or JADU shall be
located on a side or rear building façade, not facing a public right -
of
-
way.

i
ii
d
.

Exterior
lighting shall be limited to down
-
lights (or as otherwise required by the
building or fire code).

e
.

The interior horizontal dimensions
shall
be

at least 10 feet wide in every direction,
with a minimum interior wall height of seven feet.

i
v
f
.

Windows and

doors
of an ADU or JADU may
shall
not have a direct line of sight
to an adjoining residential property. Fencing, landscaping, or privacy glass may be used to provide screening and prevent a direct line of sight.

v
g
.

Windows located on the second story of

an ADU or JADU shall be either
clerestory

with the bottom of the glass at least six
feet above the finished floor

or
consist of
u
se

frosted or

obscure
d

glazing

glass
to preserve privacy
.

vii
h.

The ADU and primary dwelling must use the same driveway to access the street, unless otherwise required for fire
-
apparatus access, as determined by the
fire
authority
Milpitas Fire Department.

9 .

Landscape Design

Standards.

vi.
a.

Evergreen
landscape screening

shall

must

be planted and maintained between the
ADU and adjacent parcels as follows:

(1).

At least one 15
-
gallon size plant shall be provided for every five
linear feet of exterior wall. Alternatively, at least one 24 -
inch box size plant
shall be provided for every ten linear feet of exterior wall.

ii.

(2).

Plant specimens must be at least six

feet tall when installed. As an
alternative, a solid fence of at least 6 feet in height may be installed.

iii.

(3) .

All landscaping shall be drought tolerant.

vii
.

The ADU and primary dwelling must use the same driveway to access the street, unless otherwise required for fire
-
apparatus access, as determined by the fire
authority.

H
G
.

Fees.

1. Impact Fees and other City Fees.

No impact fee shall be
required for a
n ADU or

JADU

or for an ADU

that is less
than 750 square feet in floor area. For purposes of this paragraph, "impact fee" has the same meaning as the term "fee" is defined in the Mitigation Fee Act (Gov.

Code § 66000(b)), except that it also
includes fees specified in the Quimby Act
595
Item # 21.

Ordinance No. ___

(Gov. Code § 66477). "Impact fee" does not include any connection fee or capacity charge charged by a local agency, special district, or water corporation.

Any impact fee that is required for an ADU that is 750

dwelling).

2. Utility Fees.

When

Except as described in Subsection
XI
-
10 -

13.08 (G)(2)(a)
,
C
c
onverted ADUs and
JADUs on a single
-
family lot that are created under Subsection XI
-
10 -

13.08(
F
D
)(1)(a)
above
are not required to have a new or separate utility
connection directly between the ADU or JADU and the utility. Nor is a connection fee or capacity charge required.

ADUs and JADUs that are not covered by Subsection XI
-
10 -

13.08(H)(2)(a) are
also not req
uired to have a new or separate utility connection directly between the ADU or JADU and the utility.

Except as described in Subsection XI
-
10 -

13.08(G)(2)(a),
a
ll ADUs and JADUs
that are not covered by
Subsection XI
-
10 -

13.08 (G)(2)(b) require a new, separate
utility connection directly between the ADU and the
utility.

ii.

The portion of the fee or charge that is charged by the City may not exceed the reasonable cost of providing this service.

Nonconforming Zoning Code Conditions, Building Code Violations, and Unpermitted Structures.

1. The
C
ity
shall

not deny an ADU or JADU application due to a nonconforming zoning condition, building code violation, or unpermitted structure on the lot that does not 596
Item # 21.

Ordinance No. ___

present a threat to the public health and safety and that is not affected by the construction of the AD
U or JADU.

2. Unpermitted ADUs constructed before 2018.

The ADU violates applicable building standards, or

ii.

The ADU does not comply with Government Code section 65852.2

(State
ADU law
) or this ADU ordinance (
MMC Section XI
-
10 -

13.08 ).

Exceptions:

Notwithstanding
Subsection XI
-
10 -

13.08 (H)(2)(a)
above, the
C
ity may deny
a permit to legalize an existing but unpermitted ADU that was constructed before January 1, 2018, if the
Building Official

makes a finding that
correcting a violation is necessary to
protect the health and safety of the
public or of occupants of the structure.

ii
.

Subsection XI
-
10 -

13.08 (H)(2)(a)
above does not apply to a building that is
deemed to be substandard in accordance with California Health and Safety Code section 17920.3.

K
I
.

Nonconforming ADUs and Discretionary Approval. Any proposed ADU or JADU that does not conform to the objective standards set forth in Subsections XI -
10 -

13.08(A) through (H)
may be allowed by the City with a Minor Site Development Permit, in accordance with

Section XI
-
10 -
57 "Applications".

SECTION 5.

SEVERABILITY

The provisions of this Ordinance are separable, and the invalidity of any phrase, clause, provision, or part has no effect on the validity of the remainder.

SECTION 6.

EFFECTIVE DATE AND

POSTING

published in accordance with
Section 36933 of the Government Code of the State of California.

SECTION 7
.

SUBMISSION TO HCD

The City Clerk shall submit a copy of this Ordinance to the Department of Housing and Community Development within 60 days after ad
option.

597
Item # 21.

Ordinance No. ___

598
Item # 21.

RESOLUTION NO.
2 2
-
02 8

A RESOLUTION OF THE PLANNING COMMISSION OF THE CITY OF MILPITAS

RECOMMENDING

THAT

THE CITY COUNCIL

ADOPT A REGULAR ORDINANCE
TO

A
PPROV
E

ZONING TEXT AMENDMENT

ZA22
-
0007

AMEND
ING

SECTION

13 “

SPECIAL USES
”

CHAPTER
10 “
ZONING
”

OF TIT
L
E

XI
OF
TH
E

MILPITAS

MUNICIPA

L CODE RELATING

ACCESSORY DWELLING UNIT
S
, AND

DETERMINING THE AMENDMENT TO BE EXEMPT

FROM
THE CA

LIFORNIA

ENVIRONM

ENTAL QUALITY ACT (CEQA)

WHEREAS
, the City of Mi
lpitas, California (
th
e “City”) is a municipal corporation,
d
uly
organized under the const
itution and laws of the State of California; and

WHEREAS
,

the Planning and Zoning Law authorizes cities to act by ordinance to provide for the creation and regulatio
n of accessory dwellin
g units (“ADUs”) and junior
accessory
d
wel
ling units (“JADUs”); and

W
H
EREAS
,

In September

and October

of 2022
, the California Legislature approved,
and the Governor signed into law, Assembly Bill 2221 (
“
AB 222
1 ”
) and Senate Bill 897 (
“
SB
897
”
)
, which

among other things, amended
S
ections 658
52 .2, 65852.22, and 65852.23
of

the
Government Code and
S
ec
tion 17980.12 of the Health and Safety Code to impose new limits on local authority to regulate ADUs and JADUs
; and

WHEREAS
,

the City desires to
amend
existing provisions in
Milpitas Municipal Co
de

section XI
-
10 -

13.08 related to the regulation of ADUs and JADUs to
comply with the
2022
ADU Laws
; and

W
HEREAS
,

State law requires consistency betwee
n local regulations for ADUs and
JADUs and the state ADU la
w,

the City must

amend

the current prov
is
ions of

Milpitas
Municipal

Code
S
ection
XI
-
10 -

13.08 (“Accessory Dwelling Units”)

to comply with the new
provisions of AB 2221 and SB 897
;

and

WHEREAS
,

the City desires to

ame
nd

existing
provisions

in
Milpitas Muni
cipal

Code
s
ection XI
-
10 -

13.08 related t
o
the regulation of
ADUs

and
JADUs

to add

clarity for the benefit
of staff and the
general public an
d
comply with the
changes in

state law
; and

WHEREAS
,

Plan
ning Department

staff

prepared

the proposed ordinance, including the
p
rop
osed language and terminolo
gy, and any additional information and documents deemed necessary; and

WHEREAS
, the City has pr
epared Zoning Amendment
No. ZA
2 2
-
0007

(“Amendment”)
to the City’s Municipal Code, includi
ng

modification
s and
refinements to
Sect
i
on

XI
-
10 -

13.08 (
“
Accessory Dwe
lling
Unit
s
”
)
; and

WHEREAS
, as separate and independent bases, the Planning Commission hereby finds and determines that the project is exempt from further CEQA re view
pursuant to
CEQA
DocuSign Envelope ID: 47CBFC6E-C52A-4E7E-A307-CC72DC5DB5D7 599
Item # 21.

R
esolution

N
o.
2 2
-
02 8

Page
2 Gu
idelines section
15 282
(
h
)

(
the adoptio
n

an o
rdinance regarding sec
ond units in a

single
-
family or multifamily residential zone by a city or county to implement the provisions of Sections 65852.1 and 65852.2 of the Government Code

as set forth in Section

21080.17 of the
Public R
esources

Code
)
;

a
nd

WHEREAS
, the Planning C
ommission makes and accepts as its own the findings s
et
forth in
this

R
esolution; and

WHEREAS
,

the Pl
anning Commission is an advisory body to the City Council;

and

WHEREAS
, on
November
9, 2022
, the Planni
ng Commission held
a

du
ly

noticed public
hearing o
n the
subject
Amendment
, at which all those in attendance were given the opportunity to speak on

th
e

Zoning Text Amendment
; and

WHEREAS
, the Planni
ng Commission has considered
all

the

wr
itten and oral test
imony
presented at
t
he
public hearing in making it
s decision
.

NOW THEREFORE
, the Planning Commission of the City of Milpitas hereby finds, determine
s and resolves as follows:

SECTION 1.

Recitals

The Planning Commission has duly consid
ered the full recor
d before it, which
m
ay
include but is not limited
to such things as the City staff report, testimony by staff and the public, and other materials and

evidence submitted or provided to the Planning C
ommission.

Furthermore, the recitals s
et forth above are
found to be true an
d

co
rrect and are incorporated
herein by reference.

SECTION 2.

CEQA Finding

The

Planning Commission recommends that the

City

C
ouncil find
, under
CEQA
Guidelines
, Section 15
282
(h)
, that
if
this Ordinance is
a projec
t, it is
nonetheles
s exempt from
furth
e
r e
nvironmental review

because

it is
the adoption of an o
rdinance regarding second units in
a single
-
family or multifamily reside
ntial zone by a city or county to implement the p
rovisions of
Sections 65852.1 and 65852
.2 of the Governmen
t Code as set forth

in
Section 21080.17 of the
Pub
lic Resources

Code
.

SECTION

3 .

Findings for Zoning
Amendment

In
accordance

with
Subsection XI
-
10 -

57.02(G)(3)

of
the

Milpitas Munici
pal Code, t
he
Planning Commission makes
the following f
indings based on the evidence in the p
u
bli
c record in
support of Zoni
ng Text Amendment No. ZA
2 2
-
000
7 :

1. The
proposed amendment is consistent with the General Plan.

T
he proposed zoning amendmen
ts are consistent with the Milpitas General Plan.

Specifically,
the amendments implement policy 1
-
4 of

the

Land Use Element and polic
y 4
-
1 DocuSign Envelope ID: 47CBFC6E-C52A-4E7E-A307-CC72DC5DB5D7 600
Item # 21.

R
esolution

N
o.
2 2
-
02 8

Page
3 of the Community Health and Wellness Element, which speak to the need to provide a variety of housing types suited to

a range of household types (e.g.
,

individuals, f
amilies) and
in
come levels and creating housing in cl
o
se
proximity to public transpo
rtation. The zoning
amendments would also help to realize the intent of Goals C and D of the Housing Element, which call fo
r the City to facilitate new housing production a
nd support dive
rsity and
affordability in Milpitas’ h
o
usi
ng stock. Adoption of the p
roposed amendments to the Zoning
Ordinance would make it easier, faster, and more cost
-
efficient for property owners to cre
ate
ADUs and JADUs, which are typically smaller h
ousing unit typ
es that tend to be inherently
more aff
o
rda
ble. Adding more ADUs and J
ADUs within the City’s existing neighborhoods
would greatly help to meet local housing demand, especially for smaller house holds with
lower
-

to moderate incomes such as stu
dents, single w
orking individuals, and seniors.

In
a
ddi
tion, consistent with Gover
nment Code Section 65852.2(a)(1)(C), the proposed zoning amendments include a provision stating that ADUs and JADUs are a r esidential use that is
consistent with the existi
ng General Plan

designation for the subject property.

2. Th
e proposed amendment will n
ot adversely affect the public health, safety and welfare.

to privacy and solar access) on adjacent
properties. In this respect
,

the amendments wil
l serve to protect neighborhood character and
pro
perty owner rig
hts, thereby maintaining the public he
a
lth
, safety, and welfare.

SE
CTION
4 :

Planning Commission Action

The Planning Commission of the City of Milpitas hereby adopts

Resolution No.
2 2
-
0 2
8 re
commending

that the

City Council a
dopt
Zoning
Tex
t
Amendment ZA
2 2
-
000
7 b
ased on the
above Findings.

P
AS
S

ED AND ADOPTED

at a regular

meeting of the Planning Commission of the City of
Milpitas on

No
vember 9
, 20
2 2
.

Chair

DocuSign Envelope ID: 47CBFC6E-C52A-4E7E-A307-CC72DC5DB5D7 Nov-10-2022
601
Item # 21.

Resolution No. 22-028 Page 4

TO
WIT:

I HEREBY CERTIFY that the following resolution was duly adopted at a regular meeting of the Planning Commission of the City of Milpitas on November 9, 2022 and carried by the following roll call vote:

COMMISSIONER AYES NOES ABSENT ABSTAIN

Mercede
s Albana
Dipak Aw
asthi
Lawrenc
e Ciardella
Bill Chuan
Alexand
er Galang
Sonia
Medina-Ashby
Zeha M
ohsin

DocuSign Envelope ID: 47CBFC6E-C52A-4E7E-A307-CC72DC5DB5D7 602
Item # 21.

CITY OF MILPITAS

AGENDA REPORT
(AR)

Item Title: Receive Staff Report on Draft Water Rates Study, Direct Staff to Proceed with Community Engagement on Proposed Rates, Including Identifying a Date for the Public Hearing and Mailing a Notice of the Public Hearing for the Proposed Water Rates (Staff Contact: Roger Lee, Interim Public Works Director, 408-586-2602; and Lauren Lai, Finance Director, 408-586-3111)
Category: Community Services and Sustainable Infrastructure Meeting Date: 12/6/2022
Recommendation: (1) Receive staff report on Draft Water Rates Study; and (2) Direct staff to proceed with community engagement on proposed rates, including identifying a date for the public hearing and mailing a notice of the public hearing not less than 45 days prior to the hearing and find a CEQA exemption.

BACKGROUND:

The City of Milpitas owns, operates and maintains an extensive network of water system infrastructure (Water System). The Water System consists of 206 miles of pipeline, four pumping stations, five storage reservoirs and pressure valves regulating seven pressure zones delivering on average 11 million gallons of drinking water per day to approximately 16,750 customer accounts. The type and number of customers served are as follows:

Customer Type Approximate Number
Single family residence 12,450
Multi-family residence* 11,800
Mobile Home* 521
Commercial/Industrial/Institutional 950
Irrigation /Recycled Water/Fire 1,400
* Multi-family are served by 1,950 customer accounts; mobile homes are served by three consumer accounts.

The City purchases wholesale drinking water from the San Francisco Public Utilities Commission (SFPUC) and Valley Water (VW). SFPUC water is delivered through the Hetch Hetchy Aqueduct originating in the Sierra Nevada Mountain Range. VW treats raw water from the Sacramento-San Joaquin River Delta, through the State Water and Federal San Felipe Projects. The City’s drinking water is an aggregate of approximately two -thirds from SFPUC and the remaining one-third from VW.

In accordance with State Regulation s and Title 4, Chapter 3, Section 4.00 of the Milpitas Municipal Code, the City must review and set water rates and charges to ensure revenues cover all system operation and maintenance (O&M) costs and all capital improvement program (CIP) costs. It is important to note that the costs for water purchases are passed through from the water wholesalers to the Milpitas rate payers. Additionally, financial reserves for unforeseen events are targeted per the City’s financial reserve policy. Collection of revenues to offset the appropriate level of expenditures ensure that the Water System is well maintained and adequately sized. For customers of the Water System, receipt of sufficient revenues ensures that delivered water is safe and reliable.

The analysis and setting of maximum water rates and charges must occur no less than every five years. Within these five years, staff annually reviews revenues and expenditures. If revenues and expenditures occur as expected, the maximum authorized rate for the upcoming year will be applied. Alternatively, if revenues and expenditures indicate the authorized upcoming rate is excessive, a lower rate may be applied. In no circumstances would staff increase rates above the maximum authorized amount without future City Council 603 Item # 22.

authorization and in accordance with the provisions of Article XIII D, Section (6)(b) of the California Constitution (commonly referred to as Proposition 218). City Council last adopted a five-year water rate and charge schedule in February of 2019. The first year of charges occurred in April 2019 and the fifth year ends on June 30, 2023.

A new five-year water rate and charge schedule is needed for an effective date beginning July 1, 2023.

In the preparation of proposing FY23/24 to FY27/28 water rates and charges, the City contracted with the financial consulting firm Raftelis to develop a Draft Water Rates Study (Study). The Study is a five-year modeling analysis with inputs of financial projections of revenue requirements, expected expenditures, and in -depth analysis of proposed rates / charges so that revenues fully offset expenditures. City Departments providing input into the Study include Public Works, Finance and the City Manager’s Office.

ANALYSIS:

The Study recommends increases to water rates and charges at an amount necessary to recover projected costs, including cost increases in wholesale water. The rates and charges recommended will ensure the Water System meets or exceeds customer requirements for water quality and quantity, avoids operational deficits and the depletion of reserves and maintains favorable credit ratings to minimize potential future debt services costs.

Operating Costs:

O&M expenses for the Water System include the purchase of wholesale water, staff costs, and costs for services and supplies. Approximately 72% of the City’s O&M expenses are the purchase of wholesale water from SFPUC and VW. Based on forecasts provided by both wholesalers, staff expects annual wholesale water cost increases of 7% to 12% over the next five years. Expected increases in wholesale water costs account for approximately 49% of the proposed five-year rate increases. FY23-24 wholesale water purchases are estimated at $24 million.

For the five-year period (FY23/24 to FY27/28) water purchases are estimated to total $137 million.

City operating costs are estimated to increase by 4% annually through FY27/28. This increase includes costs to enhance the City’s cross connection program to ensure compliance wi th State requirements and for increased support of remote monitoring / control of facilities. Expected increases in City operating costs account for approximately 12% of the proposed five -year increases. FY23/24 estimated operating costs are $10.1 million.

For the five-year period (FY23/24 to FY27/28) operating costs are estimated to total $54.6 million.

Capital Improvement Program:

On August 9, 2022, City Council adopted the 2022 Water Master Plan (Plan) that included recommendations for CIP projects th rough the year 2040. The CIP projects recommended in the Plan were prioritized based on existing conditions, completed asset renewal/replacement studies and completed risk/resiliency assessments.

High priority improvements were recommended for completion within the first five years, medium and low priority improvements were recommended for completion prior to 2040. Current funded CIP projects are being evaluated. Significant CIP projects programmed in the next five years (in 2022 dollars) include:
 Replacement or rehabilitation of assets or facilities. Projects include replacement of aging pipes, valves and improvements to above grade facilities such as pump stations and water tanks. ($16.5 million)  Detailed condition assessment of Water System ($2.7 million)  Pipeline replacement to improve flow in the system for fire suppression ($6.5 million)  Citywide cross connection survey ($750k)

Due to the cost and impact on rates in FY23/24, some projects programmed in the Plan to begin design and construction in FY23/24 were pushed to FY25/26. Increases in capital spending costs account for approximately 39% to the proposed five -year increases. For the five -year period (FY23/24 to FY27/28) capital costs are estimated to total $32.6million.

FY22-23 Ending Balance, Reserve Balance &, Capital Surcharge Balance 604
Item # 22.

For FY22/23, the Water Utility Enterprise Fund is projected to have an ending balance of $34 million. $14.8 million of this amount is set aside per targets in the City’s financial reserve policy. The remaining $19.2 million will be used to fund O&M and CIP projects from FY23/24 to FY27/28. Reserve balance details are provided in attachment #2.

Wholesale water costs are projected to increase faster than proposed customer rates and charges in the first years of the five-year schedule. Costs differences will be absorbed by existing operating surpluses and the rate stabilization reserve. In the later years of the five -year period, accumulating annual rate and charges will substantially catch up with no additional funding needed. With the proposed rate and charge increases of 6.4% annually, the reserve targets in FY27/28 are $20.8 million. Capital reserves for emergencies will be $11.3M (88% of target level), rate stabilization reserves will be $4.9M (68% of target level), pension liability reserve will be $0.8M (no target level) and infrastructure (CIP) reserves will be $5.6M (exceeds target level of "at least $2M").

Total Water Utility Enterprise Fund ending balance will be approximately $22.5 million.

A capital surcharge in customers water bills was implemented in FY16/17. The purpose of this surcharge is to provide funding for capital projects and debt service. Approximately $17.5 million is available in this fund and will be applied to the Plan projects.

Proposed Rate Recommendations:

The City’s water rate and charge schedules consist of three components, “Fixed Charges," are charged for the meter and system infrastructure, “Volume Charges” are charged per hundred cubic feet (HCF) of metered water use, and the “Capital Surcharge Charges”.

The proposed rate and charge amounts include increases for all three charges. The annual increase percentages for each charge and each of the next five years for a typical single-family residence are shown below.

Fiscal Year Fixed & Volume
Charges Capital Charges Average Bill Impact
FY24/25 6.5% 5.6% 6.4%
FY25/26 6.5% 4.3% 6.4%
FY26/27 6.5% 5.0% 6.4%
FY27/28 6.5% 5.6% 6.4%
FY28/29 6.5% 5.3% 6.4%
Volume and capital surcharge charges are charged at the same rate for all customer classifications.

Fixed charges vary by customer meter size.

If the proposed rate and charge amounts become effective on July 1, 2023, the bill would increase by approximately $9.19 bi - monthly for FY23/24 for a “typical customer,” which is a single -family residential customer, with a 5/8-inch water meter and using 14 HCF in a bi-monthly period, as shown below:

Item Current Rates Proposed Maximum Rates
FY 2023/2024
Fixed Meter Charge $34.10 $35.87
Volumetric Charge $6.70 x 14 HCF = $93.80 $7.17 x 14 HCF = $100.38 Capital Surcharge $1.08 x 14 HCF = $15.12 $1.14 x 14 HCF = $15.96 Bi-monthly Amount $143.02 $152.21
Bi-monthly Difference $9.19

605
Item # 22.

The proposed maximum rate and capital surcharge five-year fee schedule for all customers are included in attachment #3 A comparison of current rates, proposed rates and the amounts charged by other agencies are included in attachment #4.

Rate Subsidy Program:

Water funds collected as penalties and Federal American Rescue Plan Act (ARPA) funds, administered by the City, are available to eligible customers through the Milpitas Assistance Program (MAP). Currently, customers do need to have their own separate water meter to be eligible. All mobile home parks and some multi-family units in the City have one master water meter that serves multiple residents. For these cust omers, their homeowner association then bills its’ residents for water through homeowner association fees. Staff is investigating how to provide the MAP to these residents.

For eligible residents, the amount of MAP discount varies based on eligibility req uirements of four tiers. In FY21/22, the number of enrolled customers for both water and sewer was 211. Average discount amount for both water and sewer was $22 bi-monthly ($132 annually). Information regarding MAP is included in attachment #5.

Aside from MAP, public agencies providing water service may implement low -income water rate assistance programs, but rate discounts must be funded from non -rate sources of revenues – e.g., lease revenues and revenues from fines and penalties other than a civil liability imposed for violations of the City’s water conservation program. A household may qualify for Low Income Household Water Assistance Program which is a federally funded program administered through the State of California, Department of Commun ity Services and Development. Information on this program can be found at: www.csd.ca.gov/waterbill.

Proposition 218 Noticing and Community Engagement:

Proposition 218, a state proposition approved by California voters in 1996, added Article XIII D to the California Constitution which requires voter approval prior to the imposition of any new or increased existing tax, assessment or certain user fees. It also requires local agencies imposing any new or any increases in any existing property-related fees and charges to comply with certain procedural requirements prior to their adoption.

Water Service fees and charges are subject to these procedural requirements. Pursuant to Article XIII D, section 6, the City is required to hold a public hearing to consider the proposed water service rates, fees, and charges.

Additionally, the City is required to provide ratepayers and property owners with a written notice of the proposed rate increases, and the date, time and location of the public hearing on the proposed rate increase. Subdivision (a) of Section 6 of the California Constitution’s Article XIII D requires that 45 days must elapse from the time the notices are mailed until the public hearing on the prop osed rate increases. Any property owner may submit a written protest of the proposed increase. Only one protest per parcel will be counted. If a majority of parcels submit protests, the City cannot adopt the proposed rates.

Staff will prepare the notice and will ensure it is user friendly and easy to understand. The notice will include a full description of all proposed maximum rates and charges for FY23/24 through FY27/28, the reasons for and the basis upon which the rates and charges are calculated, an explanation of the process, and a description on how to participate in the process. With Council’s authorization to proceed with a notice, a special mailing notifying property owners and ratepayers of the proposed increase to the City’s water service rates, fees and charges will begin.

The Draft Water Rates Study will be finalized by March 2023 prior to the public hearing on the proposed rates.

In the interim, staff will conduct community meetings and a public workshop on the proposed rate and charge increases in January 2023.

Staff will host a series of workshops to help customers better understand the budget and infrastructure challenges facing the Water System including but not limited to, what services are paid for by water rates, what the proposed w ater rate and charge increases fund and why the City is proposing water rate and charge increases. The locations of the workshops will be included in the notice. Additionally, staff will establish a dedicated webpage on the City’s website and include a fre quently asked questions section and other pertinent information. The information will be posted to allow for the translation into over 100 languages utilizing the built- in Google Translator tool. Staff will also post information about the workshops on the City’s social media accounts 606 Item # 22.

(i.e., Facebook, Nextdoor, Twitter). The proposed schedule for the notification, community meetings, public workshops, and public hearing is below.

Date Meeting Action
December 6, 2022 City Council Council Consideration to
issue Prop 218 Notice
January – February
2023
Community Meetings and
Public Workshop
Community Outreach
March 7, 2023 City Council Public Hearing at Milpitas City Hall
Council consideration of
proposed water rates
May 9, 2023 City Council FY 2023-24 Operating
Budget Study Session
June 6, 2023 City Council Public Hearing and FY 2023-
24 Budget Adoption
July 1, 2023 New FY23/24 rate
implementation date.

POLICY ALTERNATIVE(S):

Alternative 1: Do Not Accept Water Rates Study and Defer Community Engagement and Notification on Proposed Rate Increases
Pros: The existing water rates would remain in place.

Cons: This action would delay community engagement efforts and delay action on adjusting water rates.

Reason for Not Recommending: Financially, no-action to ultimately increase rates and charges will result in revenues falling below what is needed. This would result in the delay of construction of priority capital improvement projects and an increased risk of customer requirements for water quality and quantity not being met. By FY25/26, operating reserves would fall further below policy targets and the Water System will not generate sufficient revenues to pay for its wholesale water purchases and debt services obligations without impact to the General Fund. All reserves would be depleted by FY26/27 and future credit ratings would be impacted.

FISCAL IMPACT:

If the Proposition 218 majority protest process is concluded without a majority protest and the water rate adjustments are adopted as presented, the new water rate and charge structure would generate enough revenues for the next five years to meet or exceed customer requirements for water quality and quantity, avoid operational deficits, depletion of reserves and maintains favorable credit ratings to minimize potential future debt services costs. City operating costs are estimated to increase by 4% annually through FY27/28.

California Environmental Quality Act (CEQA):

This action is exempt from CEQA as there will be no physical change to the environment.

RECOMMENDATION:

1. Receive staff report on Water Rates Study.

2. Direct staff to proceed with community engagement on proposed rates, including identifying a date for the Public Hearing and mailing a notice of the Public Hearing and proposed rates not less than 45 days prior to the Hearing.

Attachment(s):

1. Draft Water Rates Study – December 2, 2022

2. Water Utility Fund Reserve Analysis

3. Water Proposed Maximum Rate / Charge Fee Schedule

4. Water Bill Comparison for Single Family

5. Milpitas Assistance Program
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Draft Water and Wastewater Rate Study
Study Report / December 2, 2022
City of
Milpitas, CA
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Item # 22.

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445 S Figueroa St, Suite 1925
Los Angeles CA 90071

www.raftelis.com

December 2, 2022

Mr. Harris Siddiqui, PE
Principal Engineer
City of Milpitas
455 East Calaveras Boulevard
Milpitas, CA 95035

Subject: Water and Wastewater Rate Study

Dear Mr. Siddiqui,

Raftelis is pleased to provide this Draft Water and Wastewater Study Report to the City of Milpitas. The study's purpose was to develop a five-year proposed water and wastewater rate schedule for the City for Fiscal Year (FY) 2024 through FY 2028 that is fair and equitable.

The study's major goals are to:
» Develop a five-year financial plan to ensure financial sufficiency, meet operating costs, fund the long-term Capital Improvement Plan (CIP) including the projects identified in the Master Plans adopted by the City in June 2022, and maintain prudent reserves.
» Conduct a cost-of-service analysis to ensure a strong nexus between proposed water and wastewater rates and the cost to provide service to customers.

It has been a pleasure working with you, and we thank you and other City staff for the support provided to Raftelis during this study.

Sincerely,

Todd Cristiano
Project Manager
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Table of Contents

1. EXECUTIVE SUMMARY ............................................................................................................................... 1

1.1. Study Overview ................................................................................................................................. 1

1.2. Proposed Water Financial Plan ......................................................................................................... 1

1.3. Proposed Wastewater Financial Plan ............................................................................................... 3

1.4. Bill Impacts and Comparison ............................................................................................................. 6

2. INTRODUCTION ............................................................................................................................................ 8

2.1. Study Overview ................................................................................................................................. 8

3. LEGAL REQUIREMENTS AND RATE SETTING METHODOLOGY .......................................................... 9

3.1. Legal Requirements .......................................................................................................................... 9

3.2. Rate-Setting Methodology ................................................................................................................. 9

4. WATER UTILITY KEY INPUTS AND ASSUMPTIONS .............................................................................. 11

4.1. Available Fund Balance ................................................................................................................... 11

4.2. Current Water Rates ........................................................................................................................ 11

4.3. Financial Assumptions ..................................................................................................................... 12

4.4. Projected Service Connections ....................................................................................................... 12

4.5. Projected Water Use and Supply .................................................................................................... 13

5. WATER FINANCIAL PLAN ......................................................................................................................... 15

5.1. Revenues From Current Rates ....................................................................................................... 15

5.2. Operations and Maintenance Expenses ......................................................................................... 18

5.3. Debt Service .................................................................................................................................... 19

5.4. Capital Improvement Plan ............................................................................................................... 20

5.5. Financial Policies ............................................................................................................................. 20

5.6. Status Quo Financial Plan ............................................................................................................... 21

5.7. Proposed Financial Plan ................................................................................................................. 23

6. WATER COST OF SERVICE ANALYSIS ................................................................................................... 26

6.1. Methodology .................................................................................................................................... 26

6.2. Revenue Requirement..................................................................................................................... 26

6.3. Allocation of Expenses to Rate Components .................................................................................. 27

7. PROPOSED WATER RATES ..................................................................................................................... 29

7.1. Proposed FY 2024 Fixed Meter Charges ........................................................................................ 29

7.2. Proposed FY 2024 Volume Charges .............................................................................................. 29

7.3. Proposed Five-Year Rate Schedule ................................................................................................ 30

7.4. Bi-Monthly Bill Impacts .................................................................................................................... 31

8. WASTEWATER UTILITY KEY INPUTS AND ASSUMPTIONS ................................................................. 32

8.1. Available Fund Balance ................................................................................................................... 32

8.2. Current Wastewater Rates .............................................................................................................. 32

8.3. Financial Assumptions ..................................................................................................................... 33

8.4. Projected Service Connections ....................................................................................................... 33

8.5. Projected Wastewater Volumes ...................................................................................................... 34

9. WASTEWATER FINANCIAL PLAN ............................................................................................................ 36

9.1. Revenues From Current Rates ....................................................................................................... 36

9.2. Operations and Maintenance Expenses ......................................................................................... 39

9.3. Capital Improvement Plan ............................................................................................................... 40

9.1. Debt Service .................................................................................................................................... 41

9.2. Financial Policies ............................................................................................................................. 42 611
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9.3. Status Quo Financial Plan ............................................................................................................... 42

9.4. Proposed Financial Plan ................................................................................................................. 45

10. WASTEWATER COST OF SERVICE ANALYSIS...................................................................................... 48

10.1. Methodology .................................................................................................................................... 48

10.2. Units of Service ............................................................................................................................... 48

10.3. Revenue Requirement..................................................................................................................... 50

10.4. Allocation of Expenses to Rate Components .................................................................................. 50

10.1. Customer Class Costs ..................................................................................................................... 52

11. PROPOSED WASTEWATER RATES ........................................................................................................ 54

11.1. Proposed FY 2024 Fixed Meter Charges ........................................................................................ 54

11.2. Proposed FY 2024 Volume Charges .............................................................................................. 55

11.3. Proposed Five-Year Rate Schedule ................................................................................................ 55

11.4. Causes of Different Rate Changes.................................................................................................. 57

11.5. Mobile Home Rate Subsidy ............................................................................................................. 57

12. COMBINED BILL IMPACTS AND BILL COMPARISON ........................................................................... 58

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List of Tables
Table 1-1: Proposed Water Revenue Adjustments ...................................................................................................... 1 Table 1-2: Proposed Five-Year Water Rate Schedule ................................................................................................. 3 Table 1-3: Proposed Wastewater Revenue Adjustments ............................................................................................. 3 Table 1-4: Proposed Five-Year Wastewater Rate Schedule ........................................................................................ 5 Table 4-1: FY 2023 Beginning Fund Balances ........................................................................................................... 11 Table 4-2: Current Water Rate Schedule ................................................................................................................... 12 Table 4-3: Projected Number of Water Meters Under Existing Rate Structure .......................................................... 13 Table 4-4: Projected Water Use Under Existing Rate Structure ................................................................................. 14 Table 4-5: Projected Water Supply Mix ...................................................................................................................... 14 Table 5-1: Projected Fixed Meter Charge Revenues under Current Rates ............................................................... 15 Table 5-2: Projected O&M Volume Charge Revenues Under Current Rates ............................................................ 16 Table 5-3: Projected Capital Charge Revenues Under Current Rates ....................................................................... 17 Table 5-4: Projected Other Revenues ........................................................................................................................ 17 Table 5-5: Summary of Projected Revenues Under Current Rates ........................................................................... 18 Table 5-6: O&M Summary by Department ................................................................................................................. 18 Table 5-7: Water Purchase Cost Detail ...................................................................................................................... 19 Table 5-8: Schedule of Debt Service Payments ......................................................................................................... 19 Table 5-9: Capital Improvement Plan ......................................................................................................................... 20 Table 5-10: Status Quo Operating Financial Plan ...................................................................................................... 21 Table 5-11: Status Quo Capital Financial Plan ........................................................................................................... 22 Table 5-12: Status Quo Financial Plan – Projected Reserves ................................................................................... 23 Table 5-13: Proposed Revenue Adjustments ............................................................................................................. 23 Table 5-14: Proposed Operating Financial Plan ......................................................................................................... 24 Table 5-15: Proposed Capital Financial Plan ............................................................................................................. 24 Table 5-16: Proposed Financial Plan – Projected Ending Balances .......................................................................... 25 Table 6-1: FY 2024 Revenue Required from Rates ................................................................................................... 27 Table 6-2: Allocation of Revenue Requirement .......................................................................................................... 28 Table 7-1: Proposed FY 2024 Fixed Meter Charge Calculation ................................................................................. 29 Table 7-2: Proposed FY 2024 Volume Charge Calculation ........................................................................................ 29 Table 7-3: Proposed Five-Year Water Rate Schedule ............................................................................................... 30 Table 7-4: Average Residential Bill Forecast .............................................................................................................. 31 Table 7-5: Residential Bill Impacts at Varying Levels of Water Use........................................................................... 31 Table 8-1: FY 2023 Beginning Fund Balances ........................................................................................................... 32 Table 8-2: Current Wastewater Rate Schedule .......................................................................................................... 33 Table 8-3: Projected Number of Billed ERUs and Commercial Accounts .................................................................. 34 Table 8-4: Projected Wastewater Use ........................................................................................................................ 35 Table 9-1: Projected Fixed Charge Revenues under Current Rates .......................................................................... 37 Table 9-2: Projected Volume Charge Revenues Under Current Rates ...................................................................... 38 Table 9-3: Projected Other Revenues ........................................................................................................................ 39 Table 9-4: Summary of Projected Revenues Under Current Rates ........................................................................... 39 Table 9-5: O&M Summary by Department ................................................................................................................. 40 Table 9-6: Capital Improvement Plan ......................................................................................................................... 41 Table 9-7: Debt Service .............................................................................................................................................. 41 Table 9-8: Status Quo Operating Financial Plan ........................................................................................................ 43 Table 9-9: Status Quo Capital Financial Plan ............................................................................................................. 44 Table 9-10: Status Quo Financial Plan- Projected Ending Balances ......................................................................... 45 Table 9-11: Proposed Revenue Adjustments ............................................................................................................. 45 Table 9-12: Proposed Operating Financial Plan ......................................................................................................... 46 613
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Table 9-13: Proposed Capital Financial Plan ............................................................................................................. 46 Table 9-14: Proposed Financial Plan – Projected Ending Balances .......................................................................... 47 Table 10-1: FY 2024 Wastewater Units of Service ..................................................................................................... 49 Table 10-2: FY 2024 Revenue Required from Wastewater Rates ............................................................................. 50 Table 10-3: Wastewater Revenue Requirement Allocation ........................................................................................ 52 Table 10-4: Customer Class Cost of Service .............................................................................................................. 53 Table 11-1: Proposed FY 2024 Fixed Charge Calculation ......................................................................................... 54 Table 11-2: Proposed FY 2023 Volume Charge Calculation ...................................................................................... 55 Table 11-3: Proposed Five-Year Wastewater Rate Schedule .................................................................................... 56 Table 11-4: Mobile Home Subsidy Option .................................................................................................................. 57 Table 12-1: Combined Bi-Monthly Bill Impact ............................................................................................................. 58

List of Figures
Figure 1-1: Proposed Financial Plan – Projected Ending Balances ............................................................................. 2 Figure 1-2: Proposed Financial Plan – Projected Ending Balances ............................................................................. 4 Figure 1-3: Single Family Residential Water Bill Comparison with Neighboring Agencies .......................................... 6 Figure 1-4: Single Family Residential Wastewater Bill Comparison with Neighboring Agencies ................................. 7 Figure 5-1: Status Quo Financial Plan – Projected Ending Operating and Capital Balances .................................... 22 Figure 5-2: Proposed Financial Plan – Projected Ending Balances ........................................................................... 25 Figure 9-1: Status Quo Financial Plan – Projected Ending Balances ........................................................................ 44 Figure 9-2: Proposed Financial Plan – Projected Ending Balances ........................................................................... 47 Figure 12-1: Single Family Residential Water Bill Comparison with Neighboring Agencies ...................................... 59 Figure 12-2: Single Family Residential Wastewater Bill Comparison with Neighboring Agencies ............................. 60

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1.Executive Summary

1.1.Study Overview
Public water agencies in California typically conduct cost-of-service and rate studies to ensure there is a strong nexus between rates charged to customers and costs incurred to provide service, as required by Proposition 218.

The City of Milpitas (City) last conducted a cost-of-service study in 2018, which was adopted in February 2019 and established rates through Fiscal Year (FY) 2023. The City engaged Raftelis in 2022 to conduct this Water and Wastewater Rate Study to establish proposed water and wastewater rates over a five-year period from FY 2024 to FY 2028. Note that the proposed rates presented in this study report may not be implemented until formally adopted by the City Council after a public hearing.

The major study objectives are to:
» Develop a five-year financial plan that sufficiently funds the City's operations and maintenance (O&M) expenses, debt service payments, and Capital Improvement Plan (CIP) while adequately funding reserves and meeting debt coverage requirements.
» Conduct a cost-of-service analysis that establishes a clear nexus between the cost to serve customers and the water rates charged to customers, per Proposition 218 requirements. » Review the City's existing water and wastewater rate structures and recommend changes as necessary. » Develop a five-year schedule of water rates that is fair, equitable, and compliant with Proposition 218.

1.2.Proposed Water Financial Plan
Raftelis conducted a status quo cash flow analysis to evaluate whether existing water rates can adequately fund the City’s various expenses over the five-year study period. With the assistance of City staff, annual revenues, O&M expenses, debt service payments, and capital expenditures were projected through FY 2028. Raftelis projects that with no rate increases over the five-year study period, the City will fully deplete its reserves by the end of FY 2027.

This demonstrates a clear need for revenue adjustments (i.e. water rate revenue increases relative to the status quo).

Raftelis worked with City staff to develop the following proposed revenue adjustments over the five-year study period (see Table 1-1). The proposed revenue adjustments were selected to provide financial sufficiency for the City while minimizing impacts to City customers.

Table 1-1: Proposed Water Revenue Adjustments

Key factors influencing the need for proposed revenue adjustments include:
» Planned capital expenditures: Projects scheduled over the next five years total about $34M, including beginning work on the projects identified in the City’s master plan. » Increases in purchased water costs from SFPUC and SCVWD: The City's cost to purchase treated water is expected to increase by an average of 8.6 percent per year over the study period, including a 12 percent increase in 2024.

Line Description FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Effective Date of Revenue Adjustment July 1, 2023 July 1, 2024 July 1, 2025 July 1, 2026 July 1, 2027 2 O&M Revenue Adjustment 4.9% 6.5% 6.5% 6.5% 6.5%
3 Capital Revenue Adjustment 5.0% 5.0% 5.0% 5.0% 5.0%
4 Average Bill Increase - 14 hcf 6.4% 6.4% 6.4% 6.4% 6.4% 616
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Figure 1-1 shows projected ending balances over the study period relative to the City’s operating and total reserve targets under the proposed financial plan. Reserves are drawn down beginning in FY 2026 as work begins on the City’s master plan projects. Although not displayed on the chart below, the City is projected begin covering all expenses (contribute to reserves rather than drawing on them) in FY 2029. The use of reserves over this period will mitigate the impact on ratepayers while still maintaining a healthy fund balance.

Figure 1-1: Proposed Financial Plan – Projected Ending Balances

1.2.1.PROPOSED WATER RATES
Table 1-2 shows the proposed five-year water rate schedule through FY 2028. Proposed FY 2024 rates are calculated based on the results of the cost of service analysis. Overall, FY 2024 O&M rates are designed to collect

4.9 percent more rate revenue than current FY 2023 rates; capital rates will collect 5 percent more. Proposed rates beginning in FY 2025 are calculated by simply increasing the prior year's proposed rates by the proposed annual revenue adjustments.

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Table 1-2: Proposed Five-Year Water Rate Schedule

1.3.Proposed Wastewater Financial Plan
Raftelis also conducted a similar analysis to evaluate whether existing wastewater rates can adequately fund the City’s various expenses over the five-year study period. Raftelis projects that with no rate increases over the five- year study period, the City will fully deplete its reserves by the end of FY 2028. This demonstrates a clear need for revenue adjustments. Raftelis worked with City staff to develop the following proposed revenue adjustments over the five-year study period (see Table 1-3). The proposed revenue adjustments were selected to provide financial sufficiency for the City while minimizing impacts to City customers.

Table 1-3: Proposed Wastewater Revenue Adjustments

Key factors influencing the need for proposed revenue adjustments include:
» San Jose Capital Expenditures: The expense due to the City of San Jose related to capital projects at the wastewater treatment facility is expected to total approximately $36M over the study period, peaking in FY 2025 at approximately $11M.
» Replacement of the Force Main A Pipeline: The large pipeline that conveys all of the City’s wastewater to San Jose is approaching the end of its useful life and is recommended to be replaced to mitigate the risk of catastrophic failure in the near future. This is expected to cost approximately $26M. Raftelis recommends the use of bonds to finance a portion of this project.

Line
Bi-Monthly
Potable Fixed
Charges FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 5/8" 34.10$ 35.87$ 38.21$ 40.70$ 43.35$ 46.17$ 2 3/4" 51.14 47.03 50.09 53.35 56.82 60.52 3 1" 85.24 69.34 73.85 78.66 83.78 89.23 4 1 1/2" 170.48 125.14 133.28 141.95 151.18 161.01 5 2" 272.76 192.10 204.59 217.89 232.06 247.15 6 3" 511.43 404.13 430.40 458.38 488.18 519.92 7 4" 852.38 716.60 763.18 812.79 865.63 921.90 8 6" 1,704.76 1,464.29 1,559.47 1,660.84 1,768.80 1,883.78 9 8" 1,704.76 3,138.22 3,342.21 3,559.46 3,790.83 4,037.24 10 10" 1,704.76 4,700.56 5,006.10 5,331.50 5,678.05 6,047.13 Line Volume Charges FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Potable 6.70$ 7.17$ 7.64$ 8.14$ 8.67$ 9.24$ 2 Recycled 4.51 5.41 5.77 6.15 6.55 6.98 3 Capital 1.08 1.14 1.20 1.26 1.33 1.40 Line Description FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Effective Date of Revenue Adjustment July 1, 2023 July 1, 2024 July 1, 2025 July 1, 2026 July 1, 2027 2 Revenue Adjustment 4.00% 4.00% 4.00% 4.00% 4.00%
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Figure 1-1 shows projected ending balances over the study period relative to the City’s operating and total reserve targets under the proposed financial plan. The City’s substantial reserves are heavily used over the study period to fund capital projects, including San Jose expenses and the Force Main A pipeline in FY 2026.

Figure 1-2: Proposed Financial Plan – Projected Ending Balances

1.3.1.PROPOSED WASTEWATER RATES
Table 1-4 shows the proposed five-year water rate schedule through FY 2028. Proposed FY 2024 rates are calculated based on the results of the cost of service analysis. Overall, FY 2024 O&M rates are designed to collect 4 percent more rate revenue than current FY 2023 rates. Proposed rates beginning in FY 2025 are calculated by simply increasing the prior year's proposed rates by the proposed annual revenue adjustments.

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Table 1-4: Proposed Five-Year Wastewater Rate Schedule

Line Fixed Charge Schedule FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single-Family 124.14 128.44 133.58 138.93 144.49 150.27 2 Multi-Family 95.34 97.96 101.88 105.96 110.20 114.61 3 Mobile Home 78.28 97.61 101.52 105.59 109.82 114.22 4 Schools/Colleges 27.35 29.25 30.43 31.65 32.92 34.24 5 Motels and Hotels 27.35 29.25 30.43 31.65 32.92 34.24 6 General Office 27.35 29.25 30.43 31.65 32.92 34.24 7 City of Milpitas 27.35 29.25 30.43 31.65 32.92 34.24 8 Service Stations 27.35 29.25 30.43 31.65 32.92 34.24 9 Eat/Drink Establishments 27.35 29.25 30.43 31.65 32.92 34.24 10 Convalescent Hosp/Daycare 27.35 29.25 30.43 31.65 32.92 34.24 11 Personal Services, Laundrys 27.35 29.25 30.43 31.65 32.92 34.24 12 Electrical/Electronics 27.35 29.25 30.43 31.65 32.92 34.24 13 Machinery Manufacture 27.35 29.25 30.43 31.65 32.92 34.24 14 RockTenn (Jefferson Smurfit) 27.35 29.25 30.43 31.65 32.92 34.24 15 T. Marzetti Co. 27.35 29.25 30.43 31.65 32.92 34.24 16 Prudential Overall Supply 27.35 29.25 30.43 31.65 32.92 34.24 17 Evoqua Water Technologies 27.35 29.25 30.43 31.65 32.92 34.24 18 Elmwood Rehabilitation 27.35 29.25 30.43 31.65 32.92 34.24 19 Linear Technology 27.35 29.25 30.43 31.65 32.92 34.24 20 DS Waters of America 27.35 29.25 30.43 31.65 32.92 34.24 21 Magic Tech & Headway Tech 27.35 29.25 30.43 31.65 32.92 34.24 22 Lucky Pure Water 27.35 29.25 30.43 31.65 32.92 34.24 23 Milpitas Materials 27.35 29.25 30.43 31.65 32.92 34.24 24 Union Pacific Railroad 27.35 29.25 30.43 31.65 32.92 34.24 25 Cisco 27.35 29.25 30.43 31.65 32.92 34.24 Line Volume Charge Schedule FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single-Family - - - - 2 Multi-Family - - - - 3 Mobile Home - - - - 4 Schools/Colleges 9.99 11.58 12.04 12.53 13.04 13.57 5 Motels and Hotels 5.75 5.64 5.88 6.12 6.37 6.63 6 General Office 6.84 6.92 7.20 7.49 7.79 8.11 7 City of Milpitas 5.80 5.59 5.82 6.06 6.31 6.57 8 Service Stations 5.70 5.61 5.84 6.08 6.33 6.59 9 Eat/Drink Establishments 9.06 10.88 11.32 11.78 12.26 12.76 10 Convalescent Hosp/Daycare 5.60 5.45 5.67 5.90 6.14 6.39 11 Personal Services, Laundrys 5.31 4.97 5.17 5.38 5.60 5.83 12 Electrical/Electronics 6.72 6.82 7.10 7.39 7.69 8.00 13 Machinery Manufacture 8.43 9.92 10.32 10.74 11.17 11.62 14 RockTenn (Jefferson Smurfit) 10.46 10.79 11.23 11.68 12.15 12.64 15 T. Marzetti Co. 12.09 11.17 11.62 12.09 12.58 13.09 16 Prudential Overall Supply 8.42 9.88 10.28 10.70 11.13 11.58 17 Evoqua Water Technologies 7.06 6.40 6.66 6.93 7.21 7.50 18 Elmwood Rehabilitation 6.69 7.78 8.09 8.42 8.76 9.12 19 Linear Technology 6.88 6.62 6.89 7.17 7.46 7.76 20 DS Waters of America 6.04 5.38 5.61 5.84 6.08 6.33 21 Magic Tech & Headway Tech 7.32 7.73 8.04 8.37 8.71 9.06 22 Lucky Pure Water 5.29 4.95 5.15 5.36 5.58 5.81 23 Milpitas Materials 5.29 4.95 5.15 5.36 5.58 5.81 24 Union Pacific Railroad 7.35 7.85 8.17 8.50 8.84 9.20 25 Cisco 6.72 6.82 7.10 7.39 7.69 8.00 620
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1.4.Bill Impacts and Comparison
Figure 1-3 shows comparison of Single Family Residential bi-monthly bills with neighboring agencies. All bills are representative of a typical residential customer with a 5/8” meter using 14 HCF per bi-monthly billing period (equal to the average residential water use in the City). Note that many of the other agencies shown are either scheduled or expected to implement rate increases in FY 2024, which are not reflected in the graphs. Many other factors affect rates such as whether or not a water purveyor receives a portion of county property tax revenue, infrastructure age and condition, whether the system has to pump water up to higher elevations, water source, and the willingness of the agency to reinvest in the system to maintain infrastructure.

Figure 1-3: Single Family Residential Water Bill Comparison with Neighboring Agencies

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Figure 1-4: Single Family Residential Wastewater Bill Comparison with Neighboring Agencies

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2.Introduction

2.1. Study Overview
Public water agencies in California typically perform a cost-of-service analysis to ensure that customers are appropriately charged for water and wastewater service commensurate with the cost to provide service. The City engaged Raftelis in 2022 to conduct this Water and Wastewater Rate Study to establish proposed water and wastewater rates for FY 2024 through FY 2028. Note that proposed rates cannot be implemented until formally adopted by the City Council after a public hearing. Proposition 218 requires that City customers must be mailed a public hearing notice detailing any proposed rate changes no fewer than 45 days before the public hearing.

Study Objectives
The major study objectives are to:
» Develop a five-year financial plan that sufficiently funds the City's operations and maintenance (O&M) expenses, debt service payments, and capital expenditures while adequately funding reserves and meeting debt coverage requirements.
» Conduct a cost of service analysis that establishes a clear nexus between the cost to serve customers and the water rates charged to customers, per Proposition 218 requirements. » Review the City’s existing water and wastewater rate structures and recommend changes as necessary to ensure that proposed rates achieve financial sufficiency while furthering the City’s policy goals of affordability and conservation.
» Develop a five-year schedule of water and wastewater rates that are fair, equitable, and compliant with Proposition 218 requirements.

Reliance on City Provided Data
During this project, the City (and/or its representatives) provided Raftelis with a variety of technical information, including cost and revenue data. Raftelis reviewed the data provided for reasonableness but did not independently assess or test for the accuracy of such data – historic or projected. Raftelis has relied on this data in the formulation of our findings and subsequent recommendations, as well as in the preparation of this report. Raftelis also relied on cost allocation data provided by the City needed to complete the cost of service analysis.

There are often differences between actual and projected data. Some of the assumptions used for projections in this report will not be realized, and unanticipated events and circumstances may occur. Therefore, there are likely to be differences between the data or results projected in this report and actual results achieved, and those differences may be material. As a result, Raftelis takes no responsibility for the accuracy of data or projections provided by or prepared on behalf of the City, nor do we have any responsibility for updating this report for events occurring after the date of this report.

In the Study, Raftelis made rate calculations using the best estimates of the City's expected costs, planned capital improvements, and future customer demands. Making such calculations in advance is normal for public water providers because providers need to recover revenue matched to public budgets adopted in advance of their fiscal periods. For this reason, and others, achieving mathematical exactitude in rate calculations is virtually impossible.

Instead, there are methods and techniques available to water providers that promote proportionality between the costs incurred to provide water service and the demand for that service. These methods and techniques are broadly referred to as "cost-of-service principles.”
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Item # 22.

WATER AND WASTEWATER RATE STUDY 9

3.Legal Requirements and
Rate Setting Methodology

3.1.Legal Requirements
California Constitution - Article XIII D, Section 6 (Proposition 218) Proposition 218, reflected in the California Constitution as Article XIII D, was enacted in 1996 to ensure that rates and fees are reasonable and proportional to the cost of providing service. The principal requirements, as they relate to public water service, are as follows:

1. A property-related charge (such as water rates) imposed by a public agency on a parcel shall not exceed the costs required to provide the property-related service.

1. Revenues derived by the charge shall not be used for any purpose other than that for which the charge was imposed.

2. The amount of the charge imposed upon any parcel shall not exceed the proportional cost of service attributable to the parcel.

3. No charge may be imposed for a service unless that service is actually used or immediately available to the owner of the property.

4. A written notice of the proposed charge shall be mailed to both the customer of record and owner of record of each parcel at least 45 days prior to the public hearing, when the agency considers all written protests against the charge.

As stated in the American Water Works Association's (AWWA) Principles of Water Rates, Fees, and Charges: Manual of Water Supply Practices - M1 Seventh Edition (Manual M1), "water rates and charges should be recovered from classes of customers in proportion to the cost of serving those customers.” Raftelis follows industry-standard rate- setting methodologies set forth by the AWWA Manual M1 to ensure this study meets Proposition 218 requirements and establishes rates that do not exceed the proportionate cost of providing water services on a parcel basis. The methodology in the Manual M1 is a nationally recognized industry rate-making standard that courts have recognized as consistent with Proposition 218.

California Constitution Article X, Section 2
California Constitution Article X, Section 2 mandates that water resources be put to beneficial use and that the waste or unreasonable use of water be prevented through conservation. Section 106 of the Water Code declares that the highest priority use of water is for domestic purposes, with irrigation secondary. Thus, the management of water resources is part of the property-related service provided by public water suppliers to ensure the resource is available over time.

3.2.Rate-Setting Methodology
This study was conducted using industry-standard principles outlined by the AWWA Manual M1 and WEF Manual of Practice No. 27. The process and approach Raftelis utilized in the study to determine water rates is informed by the City’s policy objectives, the current water and wastewater systems and rates, and the legal requirements in California (namely, Proposition 218). The resulting financial plan, cost of service analysis, and rate 624
Item # 22.

10 CITY OF MILPITAS

design process follows five key steps, outlined below, to determine proposed rates that fulfill the City’s objectives, meet industry standards, and comply with relevant regulations.

1. Financial Plan: The first study step is to develop a multi-year financial plan that projects the City’s revenues, expenses, capital project financing, annual debt service, and reserve funding. The financial plan is used to determine the revenue adjustment, which allows the City to recover adequate revenues to fund expenses and reserves.

2. Revenue Requirement Determination: After completing the financial plan, the rate-making process begins by determining the revenue requirement for the test year, also known as the rate -setting year. The test year for this study is FY 2024. The revenue requirement should sufficiently fund the City’s operating costs, annual debt service (including coverage requirements), capital expenditures, and reserve funding as projected based on the annual budget estimates.

3. Cost of Service Analysis : The annual cost of providing water or wastewater service, or the revenue requirement, is then distributed to customer classes commensurate with their use of and burden on the water system. A cost of service analysis involves the following steps:
» Functionalize costs – the different components of the revenue requirement are categorized into functions such as supply, customer service, etc.
» Allocate to cost causation components – the functionalized costs are then allocated to cost causation components such as volume, bills, equivalent meters, etc. » Develop unit costs – unit costs for each cost causation component are determined using units of service, such as total use, peaking units, equivalent meters, number of customers, etc., for each component.
» Distribute cost components – the cost components are allocated to each customer class using the unit costs in proportion to their demand and burden on the system.

4. Rate Design: After allocating the revenue requirement to each customer class, the project team designs and calculates rates. Rates do more than simply recover costs; within the legal framework and industry standards, properly designed rates should support and optimize the City’s policy objectives. Rates also act as a public information tool in communicating these policy object ives to customers. This process also includes a rate impact analysis and sample customer bill impacts.

5. Administrative Record Preparation and Rate Adoption: The final step in a rate study is to develop the administrative record in conjunction with the rate adoption process. This report serves as the administrative record for this study. The administrative record documents the study results and presents the methodologies, rationale, justifications, and calculations used to determine the proposed rates. A tho rough and methodological administrative record serves two important functions: maintaining defensibility in a stringent legal environment and communicating the rationale for revenue adjustment s and proposed rates to customers and key stakeholders.
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Item # 22.

WATER AND WASTEWATER RATE STUDY 11

4.Water Utility Key Inputs and
Assumptions

Raftelis developed a rate model in Microsoft Excel to project financial and rate calculations over a five-year study period through FY 2028. The City’s fiscal year spans from July 1 through June 30. Projections in future years were generally made based on FY 2022 or FY 2023 data using key assumptions outlined below. All assumptions were discussed with and reviewed by City staff to ensure that the City’s unique characteristics were incorporated. Note that most table values shown throughout this report are rounded to the last digit shown and may therefore not add precisely to the totals shown.

4.1.Available Fund Balance
Table 4-1 presents the available fund balance as of the end of FY 2022 and beginning of FY 2023. The financial plan presented in this report does not propose to spend any of the Capital Reserve for Emergencies or Rate Stabilization Fund; however, portions of the existing Infrastructure Fund balance will be used for the construction of future capital projects identified in the master plan.

Table 4-1: FY 2023 Beginning Fund Balances

4.2. Current Water Rates
Table 4-2 shows the current adopted rate schedule developed during the prior rate study. Customers are currently subject to two primary charges: 1) bi-monthly Fixed Meter Charges and 2) Volume Charges per hundred cubic feet (HCF)1 of water delivered with separate O&M and Capital rates. Fixed Meter Charges vary based on meter size.

Water used by all potable customers, regardless of customer class, are subject to the same volumetric rates.

Recycled customers have a separate volumetric rate but pay the same fixed charge; these customers do not pay the capital volumetric charge.

1 One HCF equals approximately 748 gallons.

Line Fund Description Balance
Water Utility
1 Capital for Emergencies 8,167,439$
2 Rate Stabilization 4,538,374
3 CALPERS 822,539
4 Infrastructure 17,499,492
5 Total 31,027,844$
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Item # 22.

12 CITY OF MILPITAS

Table 4-2: Current Water Rate Schedule

4.3. Financial Assumptions
Inflationary assumptions were used to project O&M expenses beyond FY 2023. All inflationary factors were reviewed by City staff and are based on historical and anticipated cost increases. For O&M expen ses, a general inflation rate of 4 percent is consistent with long-term changes in the Consumer Price Index (CPI) , though recent inflation is above 3 percent. However, projections for imported water supply costs are based on projected wholesale water rate increases, as shown in detail below in Table 5-7. Interest earnings on cash reserves are projected assuming a 1 percent annual interest rate.

4.4. Projected Service Connections
Customer account growth projections are necessary to estimate water demand and rate revenues over the study period. City staff provided Raftelis with the number of water meters and fire lines by connection size fo r FY 2021; projections from 2021 data are based on forecasted growth rates per the City’s Decision Support System Model (DSS) which was used in the adopted Urban Water Management Plan (2020 UWMP) and 2020 Water Shortage Contingency Plan (2020 WSCP). Table 4-3 shows the projected number of bi-monthly bills issued by customer class and meter size in each year of the study period.

Line FY 2023
Bi-Monthly Fixed Charge ($/period)
1 5/8" 34.10$
2 3/4" 51.14
3 1" 85.24
4 1 1/2" 170.48
5 2" 272.76
6 3" 511.43
7 4" 852.38
8 6" 1,704.76
9 8" 1,704.76
10 10" 1,704.76
Volume Charges ($/hcf)
11 Potable 6.70$
12 Recycled 4.51
13 Capital Charge 1.08
Description
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Item # 22.

WATER AND WASTEWATER RATE STUDY 13

Table 4-3: Projected Number of Water Meters Under Existing Rate Structure

4.5. Projected Water Use and Supply
City staff provided Raftelis with total annual water use data by customer class for FY 2018 through FY 2021. Raftelis worked closely with City staff to develop water use projections for FY 2024 through FY 2028. Water demand projections depend on two key assumptions: account growth and water demand factor (i.e., water use per account).

Beginning in FY 2021, annual water use was projected at the customer class le vel using an annual water demand growth rate to determine total annual water use. Table 4-4 shows projected water use by customer class over the study period. The water use per account growth rate is forecasted at 0 percent through the study period.

Line Total Potable Bills FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 5/8" 74,878 75,079 75,080 75,081 75,082 75,083 2 3/4" 3,293 3,299 3,300 3,301 3,302 3,303 3 1" 8,003 8,015 8,093 8,171 8,249 8,327 4 1 1/2" 2,776 2,784 2,792 2,799 2,806 2,813 5 2" 3,390 3,405 3,420 3,433 3,446 3,459 6 3" 534 534 534 534 534 534 7 4" 362 363 364 364 364 364 8 6" 173 173 173 173 173 173 9 8" 263 263 263 263 263 263 10 10" 12 12 12 12 12 12 11 12" - - - - - - 12 Total 93,684 93,927 94,031 94,131 94,231 94,331 Line Recycled FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 5/8" - - - - - - 2 3/4" 18 18 18 18 18 18 3 1" 66 66 66 66 66 66 4 1 1/2" 312 312 312 312 312 312 5 2" 858 858 858 858 858 858 6 3" 18 18 18 18 18 18 7 4" 54 54 54 54 54 54 8 6" - - - - - - 9 8" - - - - - - 10 10" - - - - - - 11 12" - - - - - - 12 Total 1,326 1,326 1,326 1,326 1,326 1,326 628
Item # 22.

14 CITY OF MILPITAS

Table 4-4: Projected Water Use Under Existing Rate Structure

Raftelis calculated projected water purchase volumes from each water source based on direction from City Staff, as shown in Table 4-6. The City purchases treated water from the San Francisco Public Utilities Commission (SFPUC) and Valley Water (VW); recycled water is purchased from South Bay Water Recycling (SBWR).

Table 4-5 shows the water supply mix projected to meet water demand over the study period. Total water use (from Table 4-4) is adjusted to account for estimated water loss resulting from leaks in the water distribution system. Costs to purchase this water are forecasted in Table 5-7.

Table 4-5: Projected Water Supply Mix

Line Customer Class Volume (hcf) FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single Family 1,218,854 1,222,358 1,222,358 1,222,358 1,222,358 1,222,358 2 Duplex 23,466 23,466 23,466 23,466 23,466 23,466 3 Condo/Townhouse 195,512 195,512 195,512 195,512 195,512 195,512 4 Multi-Family 624,235 624,235 643,914 663,594 683,273 702,953 5 Mobile Home 23,361 23,361 23,361 23,361 23,361 23,361 6 SCC/Ed Levin 3,970 3,970 3,970 3,970 3,970 3,970 7 City - Domestic 15,246 15,514 15,781 15,915 16,049 16,182 8 City - Irrigation 107,001 109,710 112,419 113,773 115,128 116,482 9 Commercial 367,078 368,166 369,254 370,342 371,430 372,518 10 Industrial 399,569 400,518 401,466 402,415 403,363 404,312 11 Institutional/Gov/Schools 77,945 79,096 80,248 80,632 81,016 81,400 12 Nonresidential Irrigation 217,184 217,475 217,766 218,201 218,637 219,073 13 Residential Irrigation 158,635 158,635 158,635 159,093 159,551 160,009 14 Recycled 467,686 467,686 467,686 467,686 467,686 467,686 15 Total 3,899,741 3,909,701 3,935,836 3,960,317 3,984,799 4,009,281 Line Wholesale Water Purchases FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Potable Volume Purchased
1 Total Demand 3,432,055 3,442,015 3,468,150 3,492,632 3,517,114 3,541,595 2 Loss% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
3 Equals: Total Demand (hcf) 3,856,242 3,867,433 3,896,798 3,924,305 3,951,813 3,979,321 Recycled Volume Purchased
4 Total Demand 467,686 467,686 467,686 467,686 467,686 467,686 5 Loss% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%
6 Equals: Total Demand (hcf) 525,490 525,490 525,490 525,490 525,490 525,490 7 SFPUC Minimum Purchase 2,606,052 2,606,052 2,606,052 2,606,052 2,606,052 2,606,052 Water Purchases (hcf)
8 SFPUC 2,606,052 2,606,052 2,606,052 2,606,052 2,606,052 2,606,052 9 SCVWD2 1,250,190 1,261,381 1,290,746 1,318,253 1,345,761 1,373,269 10 SBWR 525,490 525,490 525,490 525,490 525,490 525,490 11 Total 4,381,732 4,392,922 4,422,287 4,449,795 4,477,303 4,504,810 629
Item # 22.

WATER AND WASTEWATER RATE STUDY 15

5. Water Financial Plan

Section 5 details the development of a proposed five-year financial plan for the water utility over the study period.

The following subsections include estimates and projections of annual revenues, O&M expenses, debt service payments, capital expenditures, and reserve funding through FY 2028. The overall purpose of the financial plan is to determine the annual rate revenue needed to achieve sufficient cash flow, maintain adequate reserves, and meet debt coverage requirements.

5.1. Revenues From Current Rates
The City’s revenues consist of rate revenues, interest earnings on cash reserves, and other miscellaneous revenues.

The rate revenue projections shown below assume that current FY 2023 rates are effective throughout the study period and therefore represent estimated revenues in the absence of any rate increase. This status quo scenario provides a baseline from which Raftelis evaluates the need for revenue adjustments (i.e., rate increases).

Calculated Water Rate Revenues
Raftelis projected water rate revenues from Fixed Meter Charges and Volume Charges for FY 2024 through FY 2028 based on current FY 2023 water rates, the projected number of water meters/private fire lines, and projected annual water use.

Table 5-1 shows projected Fixed Meter Charge revenues under current rates over the study period. Fixed Meter Charge revenues are calculated by connection size/type in each year as follows based on current FY 2023 water rates (from Table 4-2), and the projected number of water meters (from Table 4-3).

Annual Fixed Meter Charge Revenue = [ FY 2023 bi-monthly rate] × [Number of connections] × [6 Bills per year]

Table 5-1: Projected Fixed Meter Charge Revenues under Current Rates

Line Customer Class FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single Family 2,797,383$ 2,805,226$ 2,805,226$ 2,805,226$ 2,805,226$ 2,805,226$ 2 Duplex 49,747 49,747 49,747 49,747 49,747 49,747 3 Condo/Townhouse 487,760 487,760 487,760 487,760 487,760 487,760 4 Multi-Family 880,171 880,171 886,564 892,957 899,350 905,743 5 Mobile Home 30,686 30,686 30,686 30,686 30,686 30,686 6 SCC/Ed Levin 10,229 10,229 10,229 10,229 10,229 10,229 7 City - Domestic 55,541 56,240 56,939 57,195 57,451 57,707 8 City - Irrigation 56,359 57,791 59,223 59,939 60,655 61,371 9 Commercial 707,410 709,098 710,786 712,474 714,161 715,849 10 Industrial 489,318 490,307 491,295 492,284 493,273 494,262 11 Institutional/Gov/Schools 132,971 134,369 135,767 136,040 136,313 136,585 12 Nonresidential Irrigation 320,667 321,110 321,553 322,269 322,985 323,701 13 Residential Irrigation 128,983 128,983 128,983 129,426 129,869 130,313 14 Recycled 348,998 348,998 348,998 348,998 348,998 348,998 15 Private Fire 173,053 173,053 173,053 173,053 173,053 173,053 16 Total 6,669,278$ 6,683,769$ 6,696,811$ 6,708,284$ 6,719,757$ 6,731,230$ 630
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16 CITY OF MILPITAS

Table 5-2 shows projected Volume Charge revenues under current rates over the study period. Volume Charge revenues are calculated by customer class in each year as follows based on current FY 2023 water rates (from Table 4-2) and projected water use (from Table 4-4):

Annual Volume Charge Revenue = [ FY 2023 rate per HCF] × [Annual Water Use in HCF]

Table 5-2: Projected O&M Volume Charge Revenues Under Current Rates

Line Customer Class FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single Family 8,166,319$ 8,189,799$ 8,189,799$ 8,189,799$ 8,189,799$ 8,189,799$ 2 Duplex 157,223 157,223 157,223 157,223 157,223 157,223 3 Condo/Townhouse 1,309,931 1,309,931 1,309,931 1,309,931 1,309,931 1,309,931 4 Multi-Family 4,182,371 4,182,371 4,314,224 4,446,077 4,577,930 4,709,783 5 Mobile Home 156,518 156,518 156,518 156,518 156,518 156,518 6 SCC/Ed Levin* 17,744 21,039 21,992 22,984 24,056 25,167 7 City - Domestic 102,150 103,942 105,734 106,630 107,526 108,422 8 City - Irrigation 716,906 735,056 753,205 762,280 771,355 780,430 9 Commercial 2,459,423 2,466,712 2,474,001 2,481,291 2,488,580 2,495,869 10 Industrial 2,677,112 2,683,467 2,689,823 2,696,178 2,702,533 2,708,888 11 Institutional/Gov/Schools 522,228 529,946 537,664 540,236 542,809 545,381 12 Nonresidential Irrigation 1,455,136 1,457,082 1,459,029 1,461,949 1,464,869 1,467,789 13 Residential Irrigation 1,062,857 1,062,857 1,062,857 1,065,924 1,068,992 1,072,059 14 Recycled 2,109,263 2,109,263 2,109,263 2,109,263 2,109,263 2,109,263 15 Private Fire - - - - - - 16 Total 25,095,182$ 25,165,207$ 25,341,263$ 25,506,283$ 25,671,383$ 25,836,523$ 631
Item # 22.

WATER AND WASTEWATER RATE STUDY 17

Table 5-3: Projected Capital Charge Revenues Under Current Rates

Other Revenues
Table 5-4 shows all other revenues. All FY 2023 other revenues are based on the latest information available to City staff and do not correspond directly to the City’s adopted budget . Additional revenues from FY 2023 through FY 2027 were projected by Raftelis. Interest revenue is estimated beginning in FY 2024 based on estimated fund balances and an assumed interest rate. Water rate revenue from Ed Levin Park is set based on contract equal to the forecasted cost of purchasing water from SFPUC. All other revenues are forecasted to remain constant.

Table 5-4: Projected Other Revenues

Table 5-5 shows a summary of projected revenues under current rates over the study period. This represents expected revenues in the absence of any rate increase over the study period.

Line Customer Class FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single Family 1,316,362$ 1,320,147$ 1,320,147$ 1,320,147$ 1,320,147$ 1,320,147$ 2 Duplex 25,343 25,343 25,343 25,343 25,343 25,343 3 Condo/Townhouse 211,153 211,153 211,153 211,153 211,153 211,153 4 Multi-Family 674,173 674,173 695,427 716,681 737,935 759,189 5 Mobile Home 25,230 25,230 25,230 25,230 25,230 25,230 6 SCC/Ed Levin 4,287 4,287 4,287 4,287 4,287 4,287 7 City - Domestic 16,466 16,755 17,044 17,188 17,333 17,477 8 City - Irrigation 115,561 118,487 121,412 122,875 124,338 125,801 9 Commercial 396,444 397,619 398,794 399,969 401,144 402,319 10 Industrial 431,535 432,559 433,583 434,608 435,632 436,657 11 Institutional/Gov/Schools 84,180 85,424 86,668 87,083 87,498 87,912 12 Nonresidential Irrigation 234,559 234,873 235,187 235,657 236,128 236,599 13 Residential Irrigation 171,326 171,326 171,326 171,821 172,315 172,810 14 Recycled - - - - - - 15 Private Fire - - - - - - 16 Total 3,706,620$ 3,717,376$ 3,745,602$ 3,772,042$ 3,798,483$ 3,824,923$ Line Other Revenue Detail FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Operating Fund
1 Interest Income 81,674$ 91,474$ 76,050$ 38,365$ (18,825)$ (97,470)$ 2 Ed Levin Park 17,744 21,039 21,992 22,984 24,056 25,167 3 Private Fire Connections 173,053 173,053 173,053 173,053 173,053 173,053 4 Subtotal 272,472$ 285,566$ 271,094$ 234,402$ 178,284$ 100,750$ Capital Fund
5 Interest Income 174,995$ 192,354$ 174,753$ 173,334$ 107,018$ 62,646$ 6 Development Charges 500,000 300,000 300,000 300,000 300,000 300,000 7 Misc. Other 7,215 7,215 7,215 7,215 7,215 7,215 8 Subtotal 682,210$ 499,569$ 481,968$ 480,549$ 414,233$ 369,861$ 9 Total 954,682$ 785,135$ 753,062$ 714,951$ 592,517$ 470,611$ 632
Item # 22.

18 CITY OF MILPITAS

Table 5-5: Summary of Projected Revenues Under Current Rates

5.2. Operations and Maintenance Expenses
Table 5-6 shows O&M expenses by department over the study period. O&M expenses shown in FY 2023 are from the City’s adopted FY 2023 budget with modifications to the water purchase cost and for addition al employees related to the City’s cross connection control program and SCADA management. All other projections beyond FY 2023 were developed based on inflationary assumptions discussed above.

Table 5-6: O&M Summary by Department

Table 5-7 shows the detailed forecast of water purchase costs. The City purchases as much water as possible from VW while still meeting minimum purchase requirements from SFPUC. Costs include a fixed charge of approximately $120,000 per month and volume rates for each unit of water purchased.

Line Revenue Type FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Operating Fund
1 Fixed Charge 6,496,225$ 6,510,716$ 6,523,758$ 6,535,231$ 6,546,704$ 6,558,177$ 2 Volume Charge 25,077,437 25,144,168 25,319,271 25,483,299 25,647,327 25,811,355 3 Other 272,472 285,634 270,417 232,898 175,872 97,342 4 Subtotal 31,846,134$ 31,940,518$ 32,113,445$ 32,251,428$ 32,369,903$ 32,466,874$ Infrastructure Fund
5 Capital Volume Charge 3,706,620$ 3,717,376$ 3,745,602$ 3,772,042$ 3,798,483$ 3,824,923$ 6 Other 682,210 499,569 481,968 480,549 414,233 369,861 7 Subtotal 4,388,830$ 4,216,945$ 4,227,570$ 4,252,592$ 4,212,716$ 4,194,784$ 8 Total 35,552,753$ 35,657,894$ 35,859,047$ 36,023,470$ 36,168,386$ 36,291,797$ Line O&M Summary FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Administration 898,693$ 934,641$ 972,027$ 1,010,908$ 1,051,344$ 1,093,398$ 2 Utility Engineering 865,791 1,169,798 1,216,590 1,265,253 1,315,863 1,368,498 3 Utility Maintenance 2,381,145 2,476,391 2,575,446 2,678,464 2,785,603 2,897,027 4 Compliance 245,963 255,801 266,033 276,675 287,742 299,251 5 Water Purchases 21,079,197 23,595,942 25,604,553 27,286,825 29,128,667 31,115,101 6 Non-Departmental 1,234,538 1,283,920 1,335,276 1,388,687 1,444,235 1,502,004 7 Finance Administration 8,171 8,498 8,838 9,191 9,559 9,941 8 Fiscal Services 1,103,052 1,147,174 1,193,061 1,240,784 1,290,415 1,342,031 9 City Attorney 9,000 9,360 9,734 10,124 10,529 10,950 10 Transfer to General Fund 2,688,427 2,795,964 2,907,803 3,024,115 3,145,079 3,270,883 11 Total 30,513,977$ 33,677,488$ 36,089,361$ 38,191,025$ 40,469,036$ 42,909,084$ 633
Item # 22.

WATER AND WASTEWATER RATE STUDY 19

Table 5-7: Water Purchase Cost Detail

5.3. Debt Service
Table 5-8 shows the City’s existing debt service obligations associated with its outstanding Series 2019 bonds.

These obligations are secured by a pledge of City revenues. The proposed financial plan assumes that no additional debt will be issued by the City over the study period.

Table 5-8: Schedule of Debt Service Payments

Line Wholesale Water Rates FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Wholesale Volume Rates (hcf)
1 SFPUC3 4.76 5.30 5.54 5.79 6.06 6.34 2 SCVWD3 - Groundwater 4.23 4.82 5.51 5.98 6.50 7.07 3 Groundwater Production Charge 3.96 4.56 5.24 5.72 6.24 6.81 4 Treated water surcharge 0.26 0.26 0.26 0.26 0.26 0.26 5 SBWR 3.72 4.32 5.00 5.48 6.00 6.56 6 Groundwater Production Charge 3.96 4.56 5.24 5.72 6.24 6.81 7 Treated water surcharge (0.24) (0.24) (0.24) (0.24) (0.24) (0.24) Wholesale Water Rate Increases
8 SFPUC3 15.9% 11.2% 4.5% 4.5% 4.5% 4.5%
9 SCVWD3 - Groundwater
10 Groundwater Production Charge 15.0% 15.0% 15.0% 9.1% 9.1% 9.1% 11 Treated water surcharge 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% SBWR
12 Groundwater Production Charge
13 Treated water surcharge 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Wholesale Fixed Charges (Monthly)
14 SFPUC Water Service Monthly Charge 14,022$ 14,022$ 14,022$ 14,022$ 14,022$ 14,022$ 15 BAWSCA Bond Monthly Surcharge 105,472 105,472 105,472 105,472 105,472 105,472 16 Annual Fixed Charge Total 1,433,928 1,433,928 1,433,928 1,433,928 1,433,928 1,433,928 Wholesale Water Total Costs
17 400-910-4424 SF Wholesale Water Purchase13,838,736$ 15,246,004$ 15,871,456$ 16,522,969$ 17,226,603$ 17,956,298$ 18 400-910-4425 SCVWD Wholesale Water Purchase5,284,855 6,081,965 7,105,901 7,886,042 8,750,827 9,709,261 19 400-910-4427 Recycled Water Purchase1,955,606 2,267,974 2,627,196 2,877,814 3,151,237 3,449,543 20 Total 21,079,197 23,595,942 25,604,553 27,286,825 29,128,667 31,115,101 Line Debt Service Forecast FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Series 2019 Debt Service
1 Principal 315,000$ 325,000$ 340,000$ 355,000$ 375,000$ 395,000$ 2 Interest 732,050 719,450 706,450 689,450 671,700 652,950 1 - - - - - - 3 Subtotal: Series 2019 Debt Service 1,047,050$ 1,044,450$ 1,046,450$ 1,044,450$ 1,046,700$ 1,047,950$ 634
Item # 22.

20 CITY OF MILPITAS

5.4. Capital Improvement Plan
The City’s adopted FY 2023 budget includes approximately $ 1.5M in capital project cost s. The City has also developed a long-term utility master plan that outlines capital project expenditures required through 2040 to address current and future system needs. These projects are shown in detail in Table 5-9 and amount to approximately $32M over the next five years. The projects are associated with distribution system reliability, aging infrastructure replacement, fire flow improvements, or system-wide reliability and safety. The capital costs assume an annual capital inflation factor of 6% per year. The final line of Table 5-9 presents the total proposed annual capital spending to be funded from rates and the use of reserves.

Table 5-9: Capital Improvement Plan

5.5. Financial Policies
Utility-specific financial policies must be considered during the financial planning process . Financial policies typically define key financial metrics that an agency strives to meet or exceed.

Required Debt Coverage
The City must meet the minimum coverage requirements on its outstanding debt to ensure that it meets the associated debt covenants. The required debt service coverage ratio (DSCR) is 1.15, which means that the City’s net revenue must amount to at least 1 .15 times annual debt service. Net revenues equal revenues less O&M expenses. Annual debt service includes annual principal and interest payments on all outstanding debt.

Line Capital Project FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Fire Flow Pipeline Improvements - - - 2,754,255 1,340,535 1,471,435 2 Interconnection - Fire Flow - - - - 479,000 - 3 Interconnection - Fire Flow - - - - 479,000 - 4 Interconnection - Fire Flow - - - - 14,000 - 5 Pipeline Condition Assessment - - - 500,000 - - 6 Detailed Facility Condition Assessment - - - 2,240,000 - - 7 Water Meter Test Program - - - 100,000 - - 8 Ongoing Asset Renewal and Replacement - - - 1,684,667 1,684,667 1,684,667 9 Physical Security Updates - Perimeter Fencing - - - 30,000 - - 10 Site Security Protocols - - - 20,000 - - 11 Harden Critical Transmission Mains against Earthquakes - Replace Isolation Valves- - - - - 2,000,000 12 ShakeAlert Participation - - - 85,000 - - 13 Previously Adopted Capital Projects 1,515,000 4,090,000 2,790,000 530,000 1,905,000 - 14 Utility Billing System - 300,000 - - - - 15 Subtotal 1,515,000$ 4,390,000$ 2,790,000$ 7,943,922$ 5,902,202$ 5,156,102$ 16 CIP Inflation Factor 106.00% 112.36% 119.10% 123.87% 128.82% 133.97% 17 Total Proposed Capital Spending 1,605,900$ 4,932,604$ 3,322,935$ 9,839,791$ 7,603,233$ 6,907,789$ 635
Item # 22.

WATER AND WASTEWATER RATE STUDY 21

» Rate Stabilization Reserve: The target is 16.67 percent of annual operating expenses. » CALPERS Reserve: Twenty percent of any remaining annual surplus after meeting O&M expenses and the reserve targets above are transferred to the CALPERS fund. » Infrastructure Fund: The remaining 80 percent portion of any operating surplus is transferred to the Infrastructure funds to be spent on capital projects in future years.

5.6. Status Quo Financial Plan
In order to evaluate the need for revenue adjustments (i.e. , rate increases), Raftelis first developed a status quo financial plan. The status quo financial plan assumes that current FY 2023 rates remain unchanged over the study period. Table 5-10 combines projected operating revenues (from Table 5-5), O&M expenses (from Table 5-6), and water purchases (from Table 5-7) to generate cash flow, ending balance, and debt coverage projections under the status quo.

Under the status-quo financial plan, net cash change (revenue less total cash expenses) is negative for most years of the study period and results in a depletion of the Capital Reserve for Emergencies and Rate Stabilization Funds by the end of FY 2027. The status quo financial plan is insufficient to meet the City’s needs. This demonstrates a clear need for revenue adjustments over the study period to increase rate revenues and achieve financial sustainability.

Table 5-10: Status Quo Operating Financial Plan

Line Operating Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Rate Revenue 31,573,662$ 31,654,884$ 31,843,028$ 32,018,530$ 32,194,031$ 32,369,532$ 2 Other Misc. Revenue 272,472 405,634 395,217 362,690 310,856 237,725 3 Use of Reserves - 1,616,971 3,851,116 5,809,805 7,964,149 10,301,827 4 Total 31,846,134$ 33,677,488$ 36,089,361$ 38,191,025$ 40,469,036$ 42,909,084$ Outflows
5 City O&M 9,434,780$ 10,081,546$ 10,484,808$ 10,904,200$ 11,340,368$ 11,793,983$ 6 Water Purchases 21,079,197 23,595,942 25,604,553 27,286,825 29,128,667 31,115,101 Reserve Contributions
7 Capital for Emergencies 986,754 - - - - - 8 Rate Stabilization 345,403 - - - - - 9 Pension - - - - - - 10 Total 31,846,134$ 33,677,488$ 36,089,361$ 38,191,025$ 40,469,036$ 42,909,084$ 11 Rate Increase 0.0% 0.0% 0.0% 0.0% 0.0%
12 Cumulative Rate Increase 0.0% 0.0% 0.0% 0.0% 0.0%
13 Debt Service Coverage Ratio 4.81 2.01 (0.10) (1.95) (3.98) (6.18) 636
Item # 22.

22 CITY OF MILPITAS

Table 5-11 presents the status quo capital financing plan. The City intends to use the dedicated capital charge, existing fund balance, and other miscellaneous revenues to make debt service payments (from Table 5-8) and finance the completion of its capital plan (from Table 5-9).

Table 5-11: Status Quo Capital Financial Plan

Figure 5-1 shows the City’s projected ending balance s under the status quo. The operating reserve targets are represented by blue line. Projected ending balances are represented by the stacked columns. The City’s total reserves will fall below the operating target in FY 2026, with reserves to be fully depleted by the end of FY 2028.2

Figure 5-1: Status Quo Financial Plan – Projected Ending Operating and Capital Balances

2 This scenario presents negative reserve balances in order to demonstrate the need for rate increases. The City is unable to implement any plan that results in negative reserves. This scenario should not be considered an alternative option.

Line Infrastructure Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Capital Charge Revenue 3,706,620$ 3,717,376$ 3,745,602$ 3,772,042$ 3,798,483$ 3,824,923$ 2 Developer Fees and Interest 682,210 499,569 481,968 480,549 414,233 369,861 3 Use of Infrastructure Reserves - 1,760,109 141,815 6,631,650 4,437,218 3,760,956 4 Total 4,388,830$ 5,977,054$ 4,369,385$ 10,884,241$ 8,649,933$ 7,955,739$ Outflows
5 Capital Projects 1,605,900$ 4,932,604$ 3,322,935$ 9,839,791$ 7,603,233$ 6,907,789$ 6 Debt Service 1,047,050 1,044,450 1,046,450 1,044,450 1,046,700 1,047,950 7 Contribution to Infrastructure Reserves 1,735,880 - - - - 8 Total 4,388,830$ 5,977,054$ 4,369,385$ 10,884,241$ 8,649,933$ 7,955,739$ 637
Item # 22.

WATER AND WASTEWATER RATE STUDY 23

Table 5-12: Status Quo Financial Plan – Projected Reserves

5.7. Proposed Financial Plan
The status quo financial plan demonstrates that the City must increase its revenues from water rates over the study period in order to adequately fund its operating and capital expenditures, meet required debt coverage, and generate sufficient reserve funding. Raftelis worked closely with City staff to select the proposed annual revenue adjustments shown in Table 5-13. Revenue adjustments represent annual percent age increases in rate revenue relative to how much rate revenue would have been collected under the prior year’s water rates.

Table 5-13: Proposed Revenue Adjustments

Table 5-14 shows the proposed financial plan pro form a. Revenue adjustments over the study period generate significant increases in rate revenues over the study period. This results in positive net oper ating cash flow and sufficient debt coverage in all years.

Line End of Year Reserves FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Capital for Emergencies 9,154,193$ 7,537,222$ 3,686,106$ (2,123,699)$ (10,087,848)$ (20,389,674)$ 2 Rate Stabilization 4,883,777 4,883,777 4,883,777 4,883,777 4,883,777 4,883,777 3 Pension 822,539 822,539 822,539 822,539 822,539 822,539 4 Infrastructure 19,235,372 17,475,263 17,333,448 10,701,798 6,264,581 2,503,625 5 Total 34,095,880$ 30,718,801$ 26,725,870$ 14,284,415$ 1,883,049$ (12,179,733)$ Line Description FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Effective Date of Revenue Adjustment July 1, 2023 July 1, 2024 July 1, 2025 July 1, 2026 July 1, 2027 2 O&M Revenue Adjustment 4.9% 6.5% 6.5% 6.5% 6.5%
3 Capital Revenue Adjustment 5.0% 5.0% 5.0% 5.0% 5.0%
4 Average Bill Increase - 14 hcf 6.4% 6.4% 6.4% 6.4% 6.4% 638
Item # 22.

24 CITY OF MILPITAS

Table 5-14: Proposed Operating Financial Plan

Table 5-15: Proposed Capital Financial Plan

Line Operating Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Rate Revenue 31,573,662$ 33,205,973$ 35,574,554$ 38,095,711$ 40,794,317$ 43,682,787$ 2 Other Misc. Revenue 272,472 405,634 410,728 415,671 425,139 439,154 3 Use of Reserves - 65,881 104,080 - - - 4 Total 31,846,134$ 33,677,488$ 36,089,361$ 38,511,383$ 41,219,456$ 44,121,941$ Outflows
5 City O&M 9,434,780$ 10,081,546$ 10,484,808$ 10,904,200$ 11,340,368$ 11,793,983$ 6 Water Purchases 21,079,197 23,595,942 25,604,553 27,286,825 29,128,667 31,115,101 Reserve Contributions
7 Capital for Emergencies 986,754 - - 320,358 750,420 1,212,857 8 Rate Stabilization 345,403 - - - - - 9 Pension - - - - - - 10 Total 31,846,134$ 33,677,488$ 36,089,361$ 38,511,383$ 41,219,456$ 44,121,941$ 11 Rate Increase 4.9% 6.5% 6.5% 6.5% 6.5%
12 Cumulative Rate Increase 4.9% 11.7% 19.0% 26.7% 35.0% 13 Debt Service Coverage Ratio 4.81 3.67 3.85 4.49 5.13 5.82 Line Infrastructure Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Capital Charge Revenue 3,706,620$ 3,903,245$ 4,129,526$ 4,366,610$ 4,617,079$ 4,881,679$ 2 Developer Fees and Interest 682,210 499,569 483,826 486,266 425,952 389,883 3 Use of Infrastructure Reserves - 1,574,240 - 6,031,365 3,606,902 2,684,177 4 Total 4,388,830$ 5,977,054$ 4,613,352$ 10,884,241$ 8,649,933$ 7,955,739$ Outflows
5 Capital Projects 1,605,900$ 4,932,604$ 3,322,935$ 9,839,791$ 7,603,233$ 6,907,789$ 6 Debt Service 1,047,050 1,044,450 1,046,450 1,044,450 1,046,700 1,047,950 7 Contribution to Infrastructure Reserves 1,735,880 - 243,968 - - - 8 Total 4,388,830$ 5,977,054$ 4,613,352$ 10,884,241$ 8,649,933$ 7,955,739$ 639
Item # 22.

WATER AND WASTEWATER RATE STUDY 25

Figure 5-2 shows the City’s projected ending balance under the proposed financial plan. The light blue line indicates the total target balance of 46.67 percent of O&M. The proposed financial plan will draw heavily on reserves as the master plan is implemented in FY 2026. Although not detailed in this report, projections indicate that the City will be able to cover all operating and capital expenses without the use of reserves beginning in FY 2029.

Figure 5-2: Proposed Financial Plan – Projected Ending Balances

Table 5-16: Proposed Financial Plan – Projected Ending Balances

Line End of Year Reserves FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Capital for Emergencies 9,154,193$ 9,088,312$ 8,984,232$ 9,304,590$ 10,055,010$ 11,267,867$ 2 Rate Stabilization 4,883,777 4,883,777 4,883,777 4,883,777 4,883,777 4,883,777 3 Pension 822,539 822,539 822,539 822,539 822,539 822,539 4 Infrastructure 19,235,372 17,661,132 17,905,099 11,873,735 8,266,833 5,582,656 5 Total 34,095,880$ 32,455,759$ 32,595,647$ 26,884,640$ 24,028,159$ 22,556,839$ 640
Item # 22.

26 CITY OF MILPITAS

6. Water Cost of Service
Analysis

Section 6 details the cost of service (COS) analysis performed for FY 2024. The COS analysis allocates the overall rate revenue requirement to customer classes based on their proportion of use of and burden on the City’s water system. This provides the basis for the development of proposed FY 2024 water rates.

6.1. Methodology
The first step in the COS analysis is to determine the revenue required from rates. The total revenue requirement is determined in the financial plan and the proposed revenue adjustments in Section 5. The framework and methodology utilized to develop the COS analysis and to apportion the revenue requirement to each customer class and tier is informed by the processes outlined in the AWWA Manual M1.

COS analyses are tailored specifically to meet the unique needs of each water system. However, there are several distinct steps in every COS analysis to recover costs from customers in an accurate, equitable, and defensible manner:

1. Cost Component Allocation: The revenue requirement is allocated to demand parameters and customer characteristics based on the design and functional parameters that characterize each expense.

2. Unit Cost Development: The revenue requirement for each cost component is divided by the appropriate units of service to determine the unit cost for each rate component.

3. Distribution of Costs to Customer Classes: The unit costs are applied to the units of service from each customer class to allocate the revenue requirement to customers in accordance with their impact on the water system.

4. Rate Design: The costs allocated to each class and the units of service for each class are used to develop fixed and volume charges.

6.2. Revenue Requirement
Table 6-1 shows the rate revenue requirement for FY 2024 (also referred to as the test year or rate-setting year). The revenue requirement is split into operating and capital categories which are later allocated to the O&M and capital rates. The expenses (Lines 1-4) are equal to FY 2024 expenses. The miscellaneous revenue (Line 6) includes interest earnings and miscellaneous revenues that are applied as offsets to the final rate revenue requirement. The contribution to reserves adjustment (Line 7) is equal to FY 2024 net cash change and represents the increase in the rate revenue requirement resulting from a n addition to operating reserves and use of infrastructure reserves in FY 2024. All aforementioned values are from the proposed financial plan pro formas (Table 5-14 and Table 5-15). The final rate revenue requirement (Line 8) is calculated as follows:

Total revenue required from rates (Line 8) = Revenue requirements (Line 5) + Other Revenues (Line 6) + Reserves (Line 7)

641
Item # 22.

WATER AND WASTEWATER RATE STUDY 27

Table 6-1: FY 2024 Revenue Required from Rates

6.3. Allocation of Expenses to Rate Components
After determining the revenue requirement, the next step of the COS analysis is to allocate O&M to the various rate components:
» Potable Supply: Part of the potable O&M volume rate intended to directly recover the cost of purchasing and pumping treated water.
» Recycled Supply: part of the recycled O&M volume rate intended to directly recover the cost of purchasing water.
» Customer: Part of the bi-monthly fixed charge that recovers the cost of providing customer service and billing. These costs are recovered from all customers equally, regardless of their size. » Meter Capacity: part of the bi-monthly fixed charge that recovers costs in proportion to the capacity of the customer meter size in recognition of the fact that customers with larger meters place a higher demand on the water system.

Table 6-2 shows the basis for allocating each O&M expense category to the various rate components. Most expense categories are allocated entirely to the corresponding cost causation component. The allocation basis for functional categories are as follows:

» Electricity: Primarily related to operating pump stations to deliver potable water . This costs scales closely with the quantity of water used.

» Potable and Recycled Water Purchases: Allocated directly to the corresponding cost components for those customers to ensure that the costs are recovered by the customers who use the water.

» Finance Administration and Fiscal Services: These costs are related to customer service, billing, and general financial services. These services are provided to customers equally, regardless of their size or quantity of water used.

Line Description Operating Capital Total
Expenses
1 City O&M 10,081,546$ 10,081,546$
2 Water Purchases 23,595,942 23,595,942
3 Debt Service 1,044,450 1,044,450
4 CIP Projects 4,932,604 4,932,604
5 Subtotal 33,677,488$ 5,977,054$ 39,654,542$
6 Other Revenues (405,634) (499,569) (905,203)$ 7 Contribution to (from) Reserves (65,881)$ (1,574,240)$ (1,640,121)$ 8 Revenue Required from Rates 33,205,973$ 3,903,245$ 37,109,218$ 642
Item # 22.

28 CITY OF MILPITAS

» Utility Engineering, Utility Maintenance, Compliance, and other Non -Departmental: These are primarily allocated to the Meter Capacity rate component. Many engineering and maintenance expenses are related to providing capacity within the system and ensuring reliable service to all customers at all times , regardless of the amount of water used. Recovering these costs on a fixed basis also provides revenue stability for the City. A portion of these expenses (approximately $120,000) are related to maintaining the recycled water distribution system and are therefore allocated to those customers alone.

» Administration, Transfer to General Fund, City Attorney, and Misc. Revenue : These expenses and revenues are primarily allocated to the General rate component, which is reallocated to all other rate components on Line 18 . The SBWR reimbursement of City operating costs related to the recycled water system is fully credited to recycled water customers.

Table 6-2: Allocation of Revenue Requirement

Line Cost Center
FY 2024
Expense
Potable
Volume
Recycled
Volume Customer
Meter
Capacity General Capital
City O&M Expenses
1 Administration 934,641$ 100.0%
2 Utility Engineering 1,169,798 3.3% 96.7%
3 Utility Maintenance 2,476,391 3.3% 96.7%
4 Compliance 255,801 100.0%
5 Non-Departmental 535,114 100.0%
6 Electricity 748,805 100.0%
7 Finance Administration 8,498 100.0%
8 Fiscal Services 1,147,174 100.0%
9 City Attorney 9,360 100.0%
10 Transfer to General Fund 2,795,964 100.0%
11 Subtotal City O&M 10,081,546$
Water Purchases
12 Potable 21,327,968 100.0%
13 Recycled 2,267,974 100.0%
14 Subtotal Water Purchases 23,595,942$
15 Contribution to Reserves (65,881) 100.0%
16 Misc. Revenues (405,634) 29.6% 70.4%
17 Subtotal Operating Expenses 33,205,973$ 22,076,774 2,267,974 1,155,672 4,251,222 3,454,331 - 18 Reallocation of General - 2,563,236 263,324 134,180 493,591 (3,454,331)$ 19 Total Operating Expenses 33,205,973$ 24,640,010$ 2,531,298$ 1,289,852$ 4,744,813$ -$ -$ 20 Capital Expenses 3,903,245 3,903,245
21 Total Units of Service 3,438,046 467,686 95,253 212,590 3,438,046 Units Potable
Volume (hcf)
Recycled
Volume (hcf)
Number of
Bills
5/8" Eq.

Meters
Potable
Volume (hcf)
22 Unit Cost 7.17$ 5.41$ 13.54$ 22.32$ 1.14$ 643
Item # 22.

WATER AND WASTEWATER RATE STUDY 29

7. Proposed Water Rates

Section 7 details the proposed water rate calculations. Proposed FY 2024 rates are calculated directly from the results of the COS allocations (from Section 6). All proposed rates beginning in FY 2025 are calculated by simply increasing the prior year's proposed rate by the annual revenue adjustment (from Table 5-13).

7.1. Proposed FY 2024 Fixed Meter Charges
Table 7-1 shows the detailed calculation of proposed FY 2024 Fixed Meter Charges which are based on Customer and Meter Capacity unit rates. Customer costs do not vary by connection type or size. Therefore, the Customer unit rate, previously derived in Table 6-2, is applied uniformly to all Fixed Meter Charges. Because Capacity costs vary by meter size based on hydraulic capacity, the unit cost is multiplied by the AWWA capacity ratio for each meter size. For example, the AWWA capacity ratio for a 1” meter is 1.67, which is multiplied by $22.32 to derive the meter component cost of $ 33.48. The two fixed charge components are added to derive the total proposed bi -monthly potable fixed charge. The fixed charge for recycled customers is simply the Customer component in order to recover customer service and billing costs without also recovering the potable O&M costs in the Meters component.

Table 7-1: Proposed FY 2024 Fixed Meter Charge Calculation

7.2. Proposed FY 2024 Volume Charges
Table 7-2 shows the proposed FY 2024 Volume Charges as derived in Table 6-2.

Table 7-2: Proposed FY 2024 Volume Charge Calculation

Line
Potable Fixed Charge
Calculation Customer Meters
Total
Proposed Current % Change % Change
1 5/8" 13.54$ 22.32$ 35.87$ 34.10$ 5.2% 1.77$ 2 3/4" 13.54 33.48 47.03 51.14 -8.0% (4.11) 3 1" 13.54 55.80 69.34 85.24 -18.7% (15.90) 4 1 1/2" 13.54 111.60 125.14 170.48 -26.6% (45.34) 5 2" 13.54 178.55 192.10 272.76 -29.6% (80.66) 6 3" 13.54 390.58 404.13 511.43 -21.0% (107.30) 7 4" 13.54 703.05 716.60 852.38 -15.9% (135.78) 8 6" 13.54 1,450.74 1,464.29 1,704.76 -14.1% (240.47) 9 8" 13.54 3,124.68 3,138.22 1,704.76 84.1% 1,433.46 10 10" 13.54 4,687.02 4,700.56 1,704.76 175.7% 2,995.80 Line Rate Proposed Current % Change % Change
1 Potable 7.17$ 6.70$ 7.0% 0.47$ 2 Recycled 5.41 4.51 20.0% 0.90 3 Capital 1.14 1.08 5.1% 0.06 644
Item # 22.

30 CITY OF MILPITAS

7.3. Proposed Five-Year Rate Schedule
Table 7-3 shows the proposed five-year schedule of water rates through FY 2027. Proposed FY 2024 Fixed Meter Charges (see Table 7-1) and Volume Charges (Table 7-2) were calculated in the preceding subsections. All proposed rates beginning in FY 2025 are calculated by increasing the prior year’s proposed rate by the proposed annual revenue adjustment (from Table 5-13). Current FY 2023 water rates (from Table 4-2) are also shown.

Table 7-3: Proposed Five-Year Water Rate Schedule

Line
Bi-Monthly
Potable Fixed
Charges FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 5/8" 34.10$ 35.87$ 38.21$ 40.70$ 43.35$ 46.17$ 2 3/4" 51.14 47.03 50.09 53.35 56.82 60.52 3 1" 85.24 69.34 73.85 78.66 83.78 89.23 4 1 1/2" 170.48 125.14 133.28 141.95 151.18 161.01 5 2" 272.76 192.10 204.59 217.89 232.06 247.15 6 3" 511.43 404.13 430.40 458.38 488.18 519.92 7 4" 852.38 716.60 763.18 812.79 865.63 921.90 8 6" 1,704.76 1,464.29 1,559.47 1,660.84 1,768.80 1,883.78 9 8" 1,704.76 3,138.22 3,342.21 3,559.46 3,790.83 4,037.24 10 10" 1,704.76 4,700.56 5,006.10 5,331.50 5,678.05 6,047.13 Line
Bi-Monthly
Recycled Fixed
Charges FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 5/8" 34.10$ 13.54$ 14.43$ 15.37$ 16.37$ 17.44$ 2 3/4" 51.14 13.54 14.43 15.37 16.37 17.44 3 1" 85.24 13.54 14.43 15.37 16.37 17.44 4 1 1/2" 170.48 13.54 14.43 15.37 16.37 17.44 5 2" 272.76 13.54 14.43 15.37 16.37 17.44 6 3" 511.43 13.54 14.43 15.37 16.37 17.44 7 4" 852.38 13.54 14.43 15.37 16.37 17.44 8 6" 1,704.76 13.54 14.43 15.37 16.37 17.44 9 8" 1,704.76 13.54 14.43 15.37 16.37 17.44 10 10" 1,704.76 13.54 14.43 15.37 16.37 17.44 Line Volume Charges FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Potable 6.70$ 7.17$ 7.64$ 8.14$ 8.67$ 9.24$ 2 Recycled 4.51 5.41 5.77 6.15 6.55 6.98 3 Capital 1.08 1.14 1.20 1.26 1.33 1.40 645
Item # 22.

WATER AND WASTEWATER RATE STUDY 31

7.4. Bi-Monthly Bill Impacts
Table 7-4 shows sample bi-monthly bills for an average residential customer with a 5/8” meter using 14 hcf per bi - monthly billing period. Table 7-5 presents a water bill under current and FY 2024 rates for a similar customer at different water use levels.

Table 7-4: Average Residential Bill Forecast

Table 7-5: Residential Bill Impacts at Varying Levels of Water Use

Line Typical Bill - 14 hcf FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Water Charges
1 Fixed Charge 34.10$ 35.87$ 38.21$ 40.70$ 43.35$ 46.17$ 2 Volume Charge 93.80 100.38 106.96 113.96 121.38 129.36 3 Capital Charge 15.12 15.96 16.80 17.64 18.62 19.60 4 Subtotal 143.02$ 152.21$ 161.97$ 172.30$ 183.35$ 195.13$ 5 Percent Change 6.4% 6.4% 6.4% 6.4% 6.4%
Current
Use Bill Bill $ Change % Change
0 34.10$ 35.87$ 1.77$ 5.2%
1 41.88 44.18 2.30 5.5%
2 49.66 52.49 2.83 5.7%
3 57.44 60.80 3.36 5.8%
4 65.22 69.11 3.89 6.0%
5 73.00 77.42 4.42 6.1%
6 80.78 85.73 4.95 6.1%
7 88.56 94.04 5.48 6.2%
8 96.34 102.35 6.01 6.2%
9 104.12 110.66 6.54 6.3%
10 111.90 118.97 7.07 6.3%
11 119.68 127.28 7.60 6.4%
12 127.46 135.59 8.13 6.4%
13 135.24 143.90 8.66 6.4%
14 143.02 152.21 9.19 6.4%
15 150.80 160.52 9.72 6.4%
16 158.58 168.83 10.25 6.5%
17 166.36 177.14 10.78 6.5%
18 174.14 185.45 11.31 6.5%
19 181.92 193.76 11.84 6.5%
20 189.70 202.07 12.37 6.5%
21 197.48 210.38 12.90 6.5%
22 205.26 218.69 13.43 6.5%
23 213.04 227.00 13.96 6.6%
24 220.82 235.31 14.49 6.6%
25 228.60 243.62 15.02 6.6%
Proposed Rates
646
Item # 22.

32 CITY OF MILPITAS

8.Wastewater Utility Key
Inputs and Assumptions

Raftelis developed a rate model in Microsoft Excel to project financial and rate calculations over a five-year study period through FY 2028. The City’s fiscal year spans from July 1 through June 30. Projections in future years were generally made based on estimated FY 2023 data using key assumptions outlined below. All assumptions were discussed with and reviewed by City staff to ensure that the City’s unique characteristics were incorporated. Note that most table values shown throughout this report are rounded to the last digit shown and may therefore not add precisely to the totals shown.

8.1.Available Fund Balance
Table 8-1 presents the available fund balance as of the end of FY 2022 and beginning of FY 2023. The financial plan presented in this report does not propose to spend any of the Capital Reserve for Emergencies or Rate Stabilization Fund; however, a significant portion of the existing Infrastructure Fund balance will be used for the construction of future capital projects identified in the master plan, particularly the Force Main A project in FY 2026.

Table 8-1: FY 2023 Beginning Fund Balances

8.2. Current Wastewater Rates
Table 8-2 shows the current adopted rate schedule developed during the prior rate study. Customers are currently subject to two primary charges: 1) bi-monthly Fixed Charges and 2) Volume Charges per hundred cubic feet (HCF)3 of water delivered. Fixed charges for the residential classes (Single Family, Multi-Family, and Mobile Homes) are charged per ERU4. Fixed charges for the commercial classes are levied on a per account basis. Only commercial customers are subject to a volumetric charge based on water use; this rate varies between classes depending on the unique wastewater quality characteristics of each class.

3 One HCF equals approximately 748 gallons.
4 ERU = Equivalent Residential Unit. One dwelling unit, such as a home, apartment, or condominium is one ERU.

Line Fund Description Balance
Wastewater Utility
1 Capital Reserve for Emergencies 3,143,350$
2 Rate Stabilization 2,095,986
3 CALPERS 3,164,653
4 Infrastructure 34,541,175
5 Total 42,945,164$
647
Item # 22.

WATER AND WASTEWATER RATE STUDY 33

Table 8-2: Current Wastewater Rate Schedule

8.3. Financial Assumptions
Inflationary assumptions were used to project O&M expenses beyond FY 2023. All inflationary factors were reviewed by City staff and are based on historical and anticipated cost increases. For O&M expenses, a general inflation rate of 4 percent is consistent with long-term changes in the Consumer Price Index (CPI) and near term inflation forecasts from the Federal Reserve Bank of Philadelphia, though recent inflation is abov e this amount.

Interest earnings on cash reserves are projected assuming a 1 percent annual interest rate.

8.4. Projected Service Connections
Customer account growth projections are necessary to estimate water demand and rate revenues over the study period. City staff provided Raftelis with the number of ERUs and commercial accounts for FY 2023; projections from 2023 data are based on forecasted growth rates detailed in the City’s METRO plan. Table 8-3 shows the projected number of units by customer class in FY 2023 and each year of the study period.

Line Customer Class Fixed Charge Volume Charge
1 Single-Family 124.14$ -$
2 Multi-Family 95.34 -
3 Mobile Home 78.28 -
4 Schools/Colleges 27.35 9.99
5 Motels and Hotels 27.35 5.75
6 General Office 27.35 6.84
7 City of Milpitas 27.35 5.80
8 Service Stations 27.35 5.70
9 Eat/Drink Establishments 27.35 9.06
10 Convalescent Hosp/Daycare 27.35 5.60
11 Personal Services, Laundrys 27.35 5.31
12 Electrical/Electronics 27.35 6.72
13 Machinery Manufacture 27.35 8.43
14 RockTenn (Jefferson Smurfit) 27.35 10.46 15 T. Marzetti Co. 27.35 12.09
16 Prudential Overall Supply 27.35 8.42
17 Evoqua Water Technologies 27.35 7.06
18 Elmwood Rehabilitation 27.35 6.69
19 Linear Technology 27.35 6.88
20 DS Waters of America 27.35 6.04
21 Magic Tech & Headway Tech 27.35 7.32
22 Lucky Pure Water 27.35 5.29
23 Milpitas Materials 27.35 5.29
24 Union Pacific Railroad 27.35 7.35
25 Cisco 27.35 6.72
648
Item # 22.

34 CITY OF MILPITAS

Table 8-3: Projected Number of Billed ERUs and Commercial Accounts

8.5. Projected Wastewater Volumes
City staff provided Raftelis with projected total annual wastewater use data by customer class for FY 2023. Raftelis worked closely with City staff to develop water use projections for FY 2024 through FY 2028. Demand projections depend on two key assumptions: account growth and water demand factor (i.e., water use per account). Beginning in FY 2023, annual water use was projected at the customer class level using an annual water demand growth rate to determine total annual water use. Billable wastewater volumes for commercial customers are based on water use with a return factor applied. Volumes for the residential classes in this Table are not used for revenue calculations, but are used below in the cost of service analysis. Table 8-4 shows projected water use by customer class over the study period. The wastewater use per account growth rate is forecasted at 0 percent through the study period.

Line Customer Class FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single-Family 75,240 75,459 75,678 75,813 75,949 76,084 2 Multi-Family 70,248 72,904 75,704 78,504 81,304 84,104 3 Mobile Home 3,126 3,126 3,126 3,126 3,126 3,126 4 Schools/Colleges 402 414 425 433 440 447 5 Motels and Hotels 156 157 157 158 158 159 6 General Office 2,226 2,234 2,242 2,251 2,259 2,268 7 City of Milpitas 228 235 241 245 250 254 8 Service Stations 252 253 254 255 256 257 9 Eat/Drink Establishments 1,026 1,030 1,033 1,037 1,041 1,045 10 Convalescent Hosp/Daycare 144 144 144 144 144 144 11 Personal Services, Laundrys 348 348 348 348 348 348 12 Electrical/Electronics 612 614 616 619 621 624 13 Machinery Manufacture 84 84 85 85 85 86 14 RockTenn (Jefferson Smurfit) 6 6 6 6 6 6 15 T. Marzetti Co. 12 12 12 12 12 12 16 Prudential Overall Supply 12 12 12 12 12 12 17 Evoqua Water Technologies (Siemens Water Tech) 12 12 12 12 12 12 18 Elmwood Rehabilitation 30 30 30 30 30 30 19 Linear Technology 36 36 36 36 36 36 20 DS Waters of America 12 12 12 12 12 12 21 Magic Tech & Headway Tech 12 12 12 12 12 12 22 Lucky Pure Water 6 6 6 6 6 6 23 Milpitas Materials 6 6 6 6 6 6 24 Union Pacific Railroad 12 12 12 12 12 12 25 Cisco 30 30 30 30 30 30 26 Total 154,278 157,187 160,239 163,203 166,167 169,131 649
Item # 22.

WATER AND WASTEWATER RATE STUDY 35

Table 8-4: Projected Wastewater Use

Line Customer Class Volume FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single-Family 1,107,882 1,111,104 1,114,326 1,116,321 1,118,315 1,120,310 2 Multi-Family 825,451 856,655 889,556 922,457 955,359 988,260 3 Mobile Home 35,875 35,875 35,875 35,875 35,875 35,875 4 Schools/Colleges 17,572 18,084 18,596 18,913 19,230 19,546 5 Motels and Hotels 74,758 75,029 75,300 75,590 75,880 76,170 6 General Office 121,612 122,054 122,495 122,966 123,438 123,910 7 City of Milpitas 11,997 12,347 12,696 12,912 13,129 13,345 8 Service Stations 16,558 16,618 16,678 16,742 16,807 16,871 9 Eat/Drink Establishments 128,268 128,734 129,199 129,696 130,194 130,691 10 Convalescent Hosp/Daycare 14,960 14,960 14,960 14,960 14,960 14,960 11 Personal Services, Laundrys 23,340 23,340 23,340 23,340 23,340 23,340 12 Electrical/Electronics 108,597 108,991 109,385 109,806 110,227 110,648 13 Machinery Manufacture 3,685 3,698 3,711 3,726 3,740 3,754 14 RockTenn (Jefferson Smurfit) 4,271 4,271 4,271 4,271 4,271 4,271 15 T. Marzetti Co. 19,850 19,850 19,850 19,850 19,850 19,850 16 Prudential Overall Supply 10,354 10,354 10,354 10,354 10,354 10,354 17 Evoqua Water Technologies 30,363 30,363 30,363 30,363 30,363 30,363 18 Elmwood Rehabilitation 64,490 64,490 64,490 64,490 64,490 64,490 19 Linear Technology 71,587 71,587 71,587 71,587 71,587 71,587 20 DS Waters of America 609 609 609 609 609 609 21 Magic Tech & Headway Tech 38,085 38,085 38,085 38,085 38,085 38,085 22 Lucky Pure Water 838 838 838 838 838 838 23 Milpitas Materials 74 74 74 74 74 74 24 Union Pacific Railroad 1,254 1,254 1,254 1,254 1,254 1,254 25 Cisco 53,232 53,232 53,232 53,232 53,232 53,232 26 Total 2,785,561 2,822,493 2,861,123 2,898,310 2,935,498 2,972,686 650
Item # 22.

36 CITY OF MILPITAS

9. Wastewater Financial Plan

Section 9 details the development of a proposed five -year financial plan for the wastewater utility over the study period. The following subsections include estimates and projections of annual revenues, O&M expenses, debt service payments, capital expenditures, and reserve funding through FY 2028. The overall purpose of the financial plan is to determine the annual rate revenue needed to achieve sufficient cash flow, maintain adequate reserves, and meet debt coverage requirements.

9.1. Revenues From Current Rates
The City’s revenues consist of rate revenues, interest earnings on cash reserves, and other miscellaneous revenues.

Calculated Wastewater Rate Revenues
Raftelis projected wastewater rate revenues from Fixed ERU Charges and Volume Charges for FY 2024 through FY 2028 based on current FY 2023 rates, the projected number of ERUs and accounts, and projected annual wastewater use.

Table 9-1 shows projected Fixed Charge revenues under current rates over the study period. Fixed Charge revenues are calculated by customer class in each year as follows based on current FY 2023 rates (from Table 8-2), the projected number of ERUs and accounts (from Table 8-3).

Annual Fixed Charge Revenue = [ FY 2023 bi-monthly rate] × [Number of units] × [6 Bills per year]

651
Item # 22.

WATER AND WASTEWATER RATE STUDY 37

Table 9-1: Projected Fixed Charge Revenues under Current Rates

Line Customer Class FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single-Family 9,340,294$ 9,367,460$ 9,394,626$ 9,411,442$ 9,428,259$ 9,445,075$ 2 Multi-Family 6,697,444 6,950,622 7,217,574 7,484,526 7,751,478 8,018,430 3 Mobile Home 244,703 244,703 244,703 244,703 244,703 244,703 4 Schools/Colleges 10,995 11,315 11,635 11,833 12,032 12,230 5 Motels and Hotels 4,267 4,282 4,298 4,314 4,331 4,347 6 General Office 60,881 61,102 61,323 61,559 61,795 62,031 7 City of Milpitas 6,236 6,417 6,599 6,711 6,824 6,936 8 Service Stations 6,892 6,917 6,942 6,969 6,996 7,022 9 Eat/Drink Establishments 28,061 28,163 28,265 28,374 28,482 28,591 10 Convalescent Hosp/Daycare 3,938 3,938 3,938 3,938 3,938 3,938 11 Personal Services, Laundrys 9,518 9,518 9,518 9,518 9,518 9,518 12 Electrical/Electronics 16,738 16,799 16,860 16,925 16,989 17,054 13 Machinery Manufacture 2,297 2,306 2,314 2,323 2,332 2,341 14 RockTenn (Jefferson Smurfit) 164 164 164 164 164 164 15 T. Marzetti Co. 328 328 328 328 328 328 16 Prudential Overall Supply 328 328 328 328 328 328 17 Evoqua Water Technologies (Siemens Water Tech) 328 328 328 328 328 328 18 Elmwood Rehabilitation 821 821 821 821 821 821 19 Linear Technology 985 985 985 985 985 985 20 DS Waters of America 328 328 328 328 328 328 21 Magic Tech & Headway Tech 328 328 328 328 328 328 22 Lucky Pure Water 164 164 164 164 164 164 23 Milpitas Materials 164 164 164 164 164 164 24 Union Pacific Railroad 328 328 328 328 328 328 25 Cisco 821 821 821 821 821 821 26 Total 16,437,352$ 16,718,629$ 17,013,681$ 17,298,222$ 17,582,763$ 17,867,305$ 652
Item # 22.

38 CITY OF MILPITAS

Table 9-2 shows projected Volume Charge revenues under current rates over the study period. Volume Charge revenues are calculated by customer class in each year as follows based on current FY 2023 wastewater rates (from Table 8-2) and projected wastewater use (from Table 8-4):

Annual Volume Charge Revenue = [ FY 2023 rate per HCF] × [Annual Wastewater Use in HCF]

Table 9-2: Projected Volume Charge Revenues Under Current Rates

Other Revenues
Table 9-3 shows all other revenues. All FY 2023 other revenues are based on the latest information available to City staff and do not correspond directly to the City’s adopted budget. Additional revenu es from FY 2023 through FY 2027 were projected by Raftelis. Interest revenue is estimated beginning in FY 2024 based on estimated fund balances and an assumed interest rate. All other revenues are forecasted to remain constant.

Line Customer Class FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Single-Family -$ -$ -$ -$ -$ -$ 2 Multi-Family - - - - - - 3 Mobile Home - - - - - - 4 Schools/Colleges 175,549 180,661 185,774 188,938 192,103 195,268 5 Motels and Hotels 429,856 431,415 432,974 434,641 436,308 437,975 6 General Office 831,829 834,846 837,864 841,090 844,316 847,541 7 City of Milpitas 69,584 71,610 73,636 74,891 76,145 77,400 8 Service Stations 94,381 94,723 95,066 95,432 95,798 96,164 9 Eat/Drink Establishments 1,162,110 1,166,326 1,170,541 1,175,048 1,179,555 1,184,061 10 Convalescent Hosp/Daycare 83,774 83,774 83,774 83,774 83,774 83,774 11 Personal Services, Laundrys 123,937 123,937 123,937 123,937 123,937 123,937 12 Electrical/Electronics 729,772 732,419 735,066 737,896 740,727 743,557 13 Machinery Manufacture 31,060 31,173 31,286 31,406 31,527 31,647 14 RockTenn (Jefferson Smurfit) 44,677 44,677 44,677 44,677 44,677 44,677 15 T. Marzetti Co. 239,984 239,984 239,984 239,984 239,984 239,984 16 Prudential Overall Supply 87,178 87,178 87,178 87,178 87,178 87,178 17 Evoqua Water Technologies (Siemens Water Tech) 214,363 214,363 214,363 214,363 214,363 214,363 18 Elmwood Rehabilitation 431,438 431,438 431,438 431,438 431,438 431,438 19 Linear Technology 492,516 492,516 492,516 492,516 492,516 492,516 20 DS Waters of America 3,679 3,679 3,679 3,679 3,679 3,679 21 Magic Tech & Headway Tech 278,785 278,785 278,785 278,785 278,785 278,785 22 Lucky Pure Water 4,433 4,433 4,433 4,433 4,433 4,433 23 Milpitas Materials 390 390 390 390 390 390 24 Union Pacific Railroad 9,218 9,218 9,218 9,218 9,218 9,218 25 Cisco 357,718 357,718 357,718 357,718 357,718 357,718 26 Total 5,896,229$ 5,915,263$ 5,934,297$ 5,951,432$ 5,968,567$ 5,985,702$ 653
Item # 22.

WATER AND WASTEWATER RATE STUDY 39

Table 9-3: Projected Other Revenues

Table 9-4 shows a summary of projected revenues under current rates over the study period. This represents expected revenues in the absence of any rate increase over the study period.

Table 9-4: Summary of Projected Revenues Under Current Rates

9.2. Operations and Maintenance Expenses
Table 9-5 shows O&M expenses by department over the study period. O&M expenses shown in FY 2023 are from the City’s adopted FY 2023 budget with modifications to the wastewater treatment cost based on t he latest information from the City of San Jose, the wastewater treatment provider for the City of Milpitas as well as the addition of personnel related to SCADA operation. All projections beyond FY 2023 were developed based on inflationary assumptions above.

Line Other Revenue Detail FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Operating Fund
1 Interest Income 102,932 69,132 71,576 74,094 76,644 84,713 2 Subtotal 102,932$ 69,132$ 71,576$ 74,094$ 76,644$ 84,713$ Infrastructure Fund
3 Interest Income 450,000$ 314,099$ 271,880$ 162,733$ (7,199)$ (49,374)$ 4 Development Fees 750,000 250,000 250,000 250,000 250,000 250,000 5 Subtotal 1,200,000$ 564,099$ 521,880$ 412,733$ 242,801$ 200,626$ 6 Total 1,302,932$ 633,232$ 593,456$ 486,827$ 319,445$ 285,339$ Line Revenue Type FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Operating Fund
1 Fixed Charge 16,437,352$ 16,718,629$ 17,013,681$ 17,298,222$ 17,582,763$ 17,867,305$ 2 Volume Charge 5,896,229 5,915,263 5,934,297 5,951,432 5,968,567 5,985,702 3 Other 102,932 69,132 71,576 74,094 76,644 84,713 4 Subtotal 22,436,512$ 22,703,024$ 23,019,554$ 23,323,748$ 23,627,974$ 23,937,719$ Infrastructure Fund
5 Other 1,200,000$ 564,099$ 521,880$ 412,733$ 242,801$ 200,626$ 6 Subtotal 1,200,000$ 564,099$ 521,880$ 412,733$ 242,801$ 200,626$ 7 Total 23,636,512$ 23,267,123$ 23,541,434$ 23,736,481$ 23,870,775$ 24,138,345$ 654
Item # 22.

40 CITY OF MILPITAS

Table 9-5: O&M Summary by Department

9.3. Capital Improvement Plan
The City’s adopted FY 2023 budget includes approximately $600 thousand in capital project costs. The City has also developed a long-term utility master plan that outlines capital project expenditures required through 2040 to address current and future system needs.

Capital costs related to improvements at the regional wastewater treatment plant are also included in the City’s CIP.

San Jose provided a forecast of capital expenses; these are expected to peak at approximately $11M in FY 2025 before decreasing to historical levels of $2-3M per year.

A significant driver of the City’s proposed rate increases is the replacement of Force Main A. The Force Main A (FMA) is a 50-year steel pipeline which conveys sewage flows from the City to the San Jose treatment facility. The pipeline is one of two critical pipelines connected to the Main Lift Sewer Pump Station from which all Milpitas sewage flows are pumped. The pipe crosses Coyote Creek after it leaves the pump station and runs through an easement on City of San Jose property, to the treatment plant. The pipeline is in a corrosive environment and is approaching the end of its useful life. Staff recommends that this pipeline be replaced as soon as possible. The study assumes that this project, totaling $26 million, will be completed in FY 2026.

These projects are shown in detail in Table 9-6 and amount to approximately $80M over the study period. The final line presents the total proposed annual capital spending.

Line O&M Summary FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Administration 1,625,083$ 1,690,087$ 1,757,690$ 1,827,998$ 1,901,118$ 1,977,162$ 2 Utility Engineering 480,513 519,108 559,248 581,618 604,882 629,078 3 Utility Maintenance 1,583,788 1,647,140 1,713,025 1,781,546 1,852,808 1,926,921 4 Compliance 191,878 199,553 207,535 215,836 224,470 233,449 5 Wastewater Treatment 6,997,426 7,277,323 7,568,416 7,871,153 8,185,999 8,513,439 6 Non-Departmental 1,124,227 1,169,196 1,215,964 1,264,602 1,315,187 1,367,794 7 Finance Administration 24,778 25,769 26,800 27,872 28,987 30,146 8 Fiscal Services 686,527 713,988 742,547 772,249 803,139 835,265 9 City Attorney - - - - - - 10 Transfer to General Fund 1,444,869 1,502,664 1,562,770 1,625,281 1,690,292 1,757,904 11 Total 14,159,089$ 14,744,828$ 15,353,996$ 15,968,156$ 16,606,882$ 17,271,157$ 655
Item # 22.

WATER AND WASTEWATER RATE STUDY 41

Table 9-6: Capital Improvement Plan

9.1.Debt Service
Table 9-7 shows the City’s existing debt service obligations associated with its outstanding Series 2017 and Series 2019 bonds. These obligations are secured by a pledge of City revenues. The proposed financial plan assumes that the City will issue a $20M bond in FY 2026 to finance the replacement of Force Main A. Debt service for this future bond was provided by the City’s financial advisor, assuming a 20 year repayment period and 7% interest rate5.

Table 9-7: Debt Service

5 Raftelis also conducted a sensitivity analysis to compare the impact of varying interest rates, bond terms, and project costs. The impact on rates over the full period of changes in financing assumptions is minimal; differences in actual debt service financing assumptions when issued will require only small changes, if any, to the proposed rates.

Line Capital Project FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Sanitary Sewer Pipeline Improvements -$ -$ -$ 995,743$ 1,417,288$ 2,912,640$ 2 Ongoing Sanitary Sewer CCTV - 200,000 100,000 100,000 - - 3 CCTV Improvements - 333,333 333,333 333,333 333,333 333,333 4 Forcemain A Design - - 939,400 - - - 5 Forcemain A Construction - - - 25,160,600 - - 6 San Jose Capital 6,655,953 6,836,915 11,329,085 6,379,020 3,009,097 2,519,945 7 Previously Adopted Capital Projects 579,000 350,000 250,000 250,000 250,000 - 8 Utility Billing System 300,000
9 Subtotal 7,234,953$ 8,020,248$ 12,951,818$ 33,218,696$ 5,009,718$ 5,765,918$ 10 CIP Inflation Factor 106.00% 112.36% 119.10% 123.87% 128.82% 133.97% 11 Total Proposed Capital Spending 7,669,050$ 9,011,551$ 15,425,823$ 41,146,559$ 6,453,534$ 7,724,780$ Line Debt Service Forecast FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Existing Debt - Series 2017
1 Principal 515,000$ 535,000$ 560,000$ 590,000$ 615,000$ 2 Interest 124,950 101,625 74,250 45,500 15,375 1 - - - - - - 3 Subtotal: Existing Debt - Series 2017 639,950$ 636,625$ 634,250$ 635,500$ 630,375$ -$ Existing Debt - Series 2019
4 Principal 505,000$ 535,000$ 560,000$ 585,000$ 615,000$ 645,000$ 5 Interest 1,286,325 1,260,325 1,232,950 1,204,325 1,174,325 1,142,825 1 - - - - - - 6 Subtotal: Existing Debt - Series 2019 1,791,325$ 1,795,325$ 1,792,950$ 1,789,325$ 1,789,325$ 1,787,825$ 7 Total Existing Debt 2,431,275$ 2,431,950$ 2,427,200$ 2,424,825$ 2,419,700$ 1,787,825$ 8 Proposed Debt Service -$ -$ -$ -$ 1,302,904$ 1,884,550$ 9 Total Debt Service 2,431,275$ 2,431,950$ 2,427,200$ 2,424,825$ 3,722,604$ 3,672,375$ 656
Item # 22.

42 CITY OF MILPITAS

9.2. Financial Policies
Utility-specific financial policies must be considered during the financial planning process. Financial policies typically define key financial metrics that an agency strives to meet or exceed.

Reserve Targets
Prudent fiscal management requires that the City maintain reserve balances to provide sufficient working capital, maintain necessary cash on hand to efficiently award construction contracts , and provide funding during emergencies. The City’s current policy consists of several targets:
» Capital Reserve for Emergencies: The City’s adopted O&M reserve target is 25 percent of annual O&M expenses. This is intended to ensure sufficient working capital during short-term fluctuations in cash flow. » Rate Stabilization Reserve: The target is 16.67 percent of annual operating expenses. » CALPERS Reserve: Twenty percent of any remaining annual surplus after meeting O&M expenses and the reserve targets above are transferred to the CALPERS fund. » Infrastructure Fund: The remaining 80 percent portion of any operating surplus is transferred to the Infrastructure funds to be spent on capital projects in future years.

9.3. Status Quo Financial Plan
In order to evaluate the need for revenue adjustments (i.e. , rate increases), Raftelis first developed a status quo financial plan. The status quo financial plan assumes that current FY 2023 rates remain unchanged over the study period.

Table 9-8 combines projected operating revenues (from Table 9-4), and O&M expenses (from Table 9-5), and debt service (from Table 9-7) to generate cash flow, ending balance, and debt coverage projections under the status quo.

Under the status-quo financial plan, net cash change (revenue less total cash expenses) is negative for most years of the study period and results in a near complete depletion of the City’s reserves in Capital Reserve for Emergencies, Rate Stabilization, and Infrastructure Funds by the end of FY 2027. The status quo financial plan is insufficient to meet the City’s needs. This demonstrates a clear need for revenue adjustments over the study period to increase rate revenues and achieve financial sustainability.
657
Item # 22.

WATER AND WASTEWATER RATE STUDY 43

Table 9-8: Status Quo Operating Financial Plan

Line Operating Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Rate Revenue 22,333,580$ 22,633,892$ 22,947,978$ 23,249,654$ 23,551,330$ 23,853,006$ 2 Other Misc. Revenue 102,932 69,132 71,576 74,094 76,644 84,713 3 Total 22,436,512$ 22,703,024$ 23,019,554$ 23,323,748$ 23,627,974$ 23,937,719$ Outflows
4 City O&M 7,161,663$ 7,467,505$ 7,785,580$ 8,097,003$ 8,420,883$ 8,757,718$ 5 Wastewater Treatment 6,997,426 7,277,323 7,568,416 7,871,153 8,185,999 8,513,439 6 Debt Service 2,431,275 2,431,950 2,427,200 2,424,825 3,722,604 3,672,375 Reserve Contributions
7 Capital for Emergencies 1,004,241 146,603 151,105 152,946 484,126 153,512 8 Rate Stabilization 669,628 97,755 100,756 101,985 322,815 102,361 9 Pension 834,456 1,056,378 997,299 935,167 498,309 547,663 10 Transfer to Infrastructure 3,337,823 4,225,510 3,989,198 3,740,670 1,993,237 2,190,651 11 Total 22,436,512$ 22,703,024$ 23,019,554$ 23,323,748$ 23,627,974$ 23,937,719$ 12 Rate Increase 0.0% 0.0% 0.0% 0.0% 0.0%
13 Cumulative Rate Increase 0.0% 0.0% 0.0% 0.0% 0.0%
14 Debt Service Coverage Ratio 3.40 3.27 3.16 3.03 1.89 1.82 658
Item # 22.

44 CITY OF MILPITAS

Table 5-11 presents the proposed capital financing plan in the status quo scenario. The use of bond proceeds is reflected on Line 3, but rate revenues are insufficient to fund remaining capital expenses.

Table 9-9: Status Quo Capital Financial Plan

Figure 9-1 shows the City’s projected ending balances under the status qu o. The operating reserve targets are represented by blue line. Projected ending balances are represented by the stacked columns. The City’s total reserves will fall below the operating target in FY 2026, with reserves to be fully depleted by the end of FY 2028.6 Figure 9-1: Status Quo Financial Plan – Projected Ending Balances

6 This scenario presents negative reserve balances in order to demonstrate the need for rate increases. The City is unable to implement any plan that results in negative reserves. This scenario should not be c onsidered an alternative option.

Line Infrastructure Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Transfer from Operating 3,337,823$ 4,225,510$ 3,989,198$ 3,740,670$ 1,993,237$ 2,190,651$ 2 Developer Fees and Interest 1,200,000 564,099 521,880 412,733 242,801 200,626 3 Bond Proceeds - - - 20,000,000 - - 4 Use of Infrastructure Reserves 3,131,227 4,221,941 10,914,745 16,993,157 4,217,496 5,333,502 5 Total 7,669,050$ 9,011,551$ 15,425,823$ 41,146,559$ 6,453,534$ 7,724,780$ Outflows
7 Capital Projects 7,669,050$ 9,011,551$ 15,425,823$ 41,146,559$ 6,453,534$ 7,724,780$ 8 Total 7,669,050$ 9,011,551$ 15,425,823$ 41,146,559$ 6,453,534$ 7,724,780$ 9 Ending Balance 31,409,948$ 27,188,007$ 16,273,262$ (719,895)$ (4,937,391)$ (10,270,893)$ 659
Item # 22.

WATER AND WASTEWATER RATE STUDY 45

Table 9-10: Status Quo Financial Plan- Projected Ending Balances

9.4. Proposed Financial Plan
The status quo financial plan demonstrates that the City must increase its revenues from water rates over the study period in order to adequately fund its operating and capital expenditures, meet required debt coverage, and generate sufficient reserve funding. Raftelis worked closely with City staff to select the proposed annual revenue adjustments shown in Table 9-11. Revenue adjustments represent annual percentage increases in rate revenue relative to how much rate revenue would have been collected under the prior year’s wastewater rates.

Table 9-11: Proposed Revenue Adjustments

Table 9-12 shows the proposed financial plan pro forma. This combines projected revenues, O&M expenses, debt service, capital expenditures, and reserve targets to generate cash flow, ending balance, and debt coverage projections under the proposed financial plan. Revenue adjustments over the study period generate significant increases in rate revenues over the study period. This results in p ositive net operating cash flow and sufficient debt coverage in all years.

Line End of Year Reserves FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Capital for Emergencies 4,147,591$ 4,294,194$ 4,445,299$ 4,598,245$ 5,082,371$ 5,235,883$ 2 Rate Stabilization 2,765,614 2,863,369 2,964,125 3,066,110 3,388,925 3,491,287 3 Pension 3,999,109 5,055,486 6,052,786 6,987,953 7,486,262 8,033,925 4 Infrastructure 31,409,948 27,188,007 16,273,262 (719,895) (4,937,391) (10,270,893) 5 Total 42,322,262$ 39,401,057$ 29,735,472$ 13,932,413$ 11,020,168$ 6,490,202$ Line Description FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Effective Date of Revenue Adjustment July 1, 2023 July 1, 2024 July 1, 2025 July 1, 2026 July 1, 2027 2 Revenue Adjustment 4.00% 4.00% 4.00% 4.00% 4.00%
660
Item # 22.

46 CITY OF MILPITAS

Table 9-12: Proposed Operating Financial Plan

Table 9-13: Proposed Capital Financial Plan

Line Operating Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Rate Revenue 22,333,580$ 23,539,248$ 24,820,533$ 26,152,699$ 27,551,725$ 29,020,829$ 2 Other Misc. Revenue 102,932 69,132 71,576 74,094 76,644 84,713 3 Total 22,436,512$ 23,608,380$ 24,892,109$ 26,226,793$ 27,628,369$ 29,105,542$ Outflows
4 City O&M 7,161,663$ 7,467,505$ 7,785,580$ 8,097,003$ 8,420,883$ 8,757,718$ 5 Wastewater Treatment 6,997,426 7,277,323 7,568,416 7,871,153 8,185,999 8,513,439 6 Debt Service 2,431,275 2,431,950 2,427,200 2,424,825 3,722,604 3,672,375 Reserve Contributions
7 Capital for Emergencies 1,004,241 146,603 151,105 152,946 484,126 153,512 8 Rate Stabilization 669,628 97,755 100,756 101,985 322,815 102,361 9 Pension 834,456 1,237,449 1,371,810 1,515,776 1,298,388 1,581,227 10 Transfer to Infrastructure 3,337,823 4,949,795 5,487,242 6,063,105 5,193,553 6,324,910 11 Total 22,436,512$ 23,608,380$ 24,892,109$ 26,226,793$ 27,628,369$ 29,105,542$ 12 Rate Increase 4.0% 4.0% 4.0% 4.0% 4.0%
13 Cumulative Rate Increase 4.0% 8.2% 12.5% 17.0% 21.7% 14 Debt Service Coverage Ratio 3.40 3.64 3.93 4.23 2.96 3.22 Line Infrastructure Cash Flow FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Inflows
1 Transfer from Operating 3,337,823$ 4,949,795$ 5,487,242$ 6,063,105$ 5,193,553$ 6,324,910$ 2 Developer Fees and Interest 1,200,000 564,099 529,123 435,028 288,544 278,830 3 Bond Proceeds - - - 20,000,000 - - 4 Use of Infrastructure Reserves 3,131,227 3,497,657 9,409,458 14,648,425 971,437 1,121,040 5 Total 7,669,050$ 9,011,551$ 15,425,823$ 41,146,559$ 6,453,534$ 7,724,780$ Outflows
7 Capital Projects 7,669,050$ 9,011,551$ 15,425,823$ 41,146,559$ 6,453,534$ 7,724,780$ 8 Total 7,669,050$ 9,011,551$ 15,425,823$ 41,146,559$ 6,453,534$ 7,724,780$ 9 Ending Balance 31,409,948$ 27,912,291$ 18,502,833$ 3,854,408$ 2,882,971$ 1,761,931$ 661
Item # 22.

WATER AND WASTEWATER RATE STUDY 47

Figure 5-2 shows the City’s projected ending balance under the proposed financial plan. The light blue line indicates the total target balance of 41.67 percent of O&M. The proposed financial plan will draw heavily on reserves as the master plan is implemented in FY 2026. Although not detailed in this report, projections indicate that the City will be able to cover all operating and capital expenses without the use of reserves beginning in FY 2029.

Figure 9-2: Proposed Financial Plan – Projected Ending Balances

Table 9-14: Proposed Financial Plan – Projected Ending Balances

48 CITY OF MILPITAS

10.Wastewater Cost of Service
Analysis

Section 6 details the cost of service (COS) analysis performed for FY 2024. The COS analysis allocates the overall rate revenue requirement to customer classes based on their proportion of use of and b urden on the City’s water system. This provides the basis for the development of proposed FY 2024 water rates.

10.1. Methodology
The first step in the COS analysis is to determine the revenue required from rates. The total revenue requirement is determined in the financial plan and the proposed revenue adjustments in Section 9. The framework and methodology utilized to develop the COS analysis and to apportion the revenue requirement to each customer class and tier is informed by the processes outlined in the WEF Manual of Practice No. 27.

COS analyses are tailored specifically to meet the unique needs of each wastewater system. However, there are several distinct steps in every COS analysis to recover costs from customers in an accurate, equitable, and defensible manner:

1. Cost component allocation: Costs are allocated to demand parameters and customer characteristics based on the design and functional parameter the characterize each expense

2. Unit cost development: The revenue requirement for each cost causation component is divided by the appropriate units of service to determine the unit cost for each rate component

3. Distribution of Costs to Customer Classe s: The unit costs are applied to the units of service from each customer class to allocate the revenue requirement to customers in accordance with their impact on the wastewater system

4. Rate Design: The costs allocated to each class and the units of service for each class are used to develop fixed and volume charges.

10.2.Units of Service
Table 10-1 summarizes the forecasted units of service for each wastewater class. ERUs, bills, and commercial volumes are from the latest available City billing data. Pollutant strengths for BOD, TSS, and NH3 as well as the estimate of days active are from estimates provided by San Jose. The pollutant units used to allocate costs are pounds per day, calculated using the contributed volume estimate and pollutant concentration for each class to estimate total annual pounds and dividing by the number of days active.

663
Item # 22.

WATER AND WASTEWATER RATE STUDY 49

Table 10-1: FY 2024 Wastewater Units of Service

Line Units of Service Days HCF Gallons / Day
Strength
(mg/l)
Pounds /
Year
Pounds /
Day
Strength
(mg/l)
Pounds /
Year
Pounds /
Day
Strength
(mg/l)
Pounds /
Year
Pounds /
Day ERUs Bills
1 Single-Family 365 1,107,882 2,270,556 250.00 1,729,040 4,737 250.00 1,729,040 4,737 35.00 242,066 663 75,459 74,644 2 Multi-Family 365 825,451 1,691,726 250.00 1,288,258 3,529 250.00 1,288,258 3,529 35.00 180,356 494 72,904 11,315 3 Mobile Home 365 35,875 73,524 250.00 55,989 153 250.00 55,989 153 35.00 7,838 21 3,126 18 4 Schools/Colleges 176 18,084 76,863 130.00 14,676 83 100.00 11,289 64 30.00 3,387 19 414 414 5 Motels and Hotels 365 75,029 153,768 310.00 145,198 398 121.00 56,674 155 7.00 3,279 9 157 157 6 General Office 261 122,054 349,818 130.00 99,053 380 80.00 60,955 234 11.00 8,381 32 2,234 2,234 7 City of Milpitas 323 12,347 28,594 130.00 10,020 31 80.00 6,166 19 11.00 848 3 235 235 8 Service Stations 365 16,618 34,058 180.00 18,674 51 280.00 29,048 80 - - - 253 253 9 Eat/Drink Establishments 365 128,734 263,834 1,250.00 1,004,554 2,752 560.00 450,040 1,233 10.00 8,036 22 1,030 1,030 10 Convalescent Hosp/Daycare 365 14,960 30,659 230.00 21,479 59 85.00 7,938 22 15.00 1,401 4 144 144 11 Personal Services, Laundrys 365 23,340 47,835 150.00 21,856 60 110.00 16,028 44 5.00 729 2 348 348 12 Electrical/Electronics 261 108,991 312,379 30.00 20,412 78 15.00 10,206 39 30.00 20,412 78 614 614 13 Machinery Manufacture 261 3,698 10,598 290.00 6,695 26 550.00 12,697 49 - - - 84 84 14 RockTenn (Jefferson Smurfit) 365 4,271 8,754 1,746.71 46,574 128 39.68 1,058 3 17.10 456 1 6 6 15 T. Marzetti Co. 313 19,850 47,440 1,555.25 192,721 616 31.16 3,861 12 0.41 51 0 12 12 16 Prudential Overall Supply 261 10,354 29,675 583.25 37,698 144 269.23 17,402 67 1.52 98 0 12 12 17 Evoqua Water Technologies 261 30,363 87,023 28.93 5,484 21 148.62 28,170 108 1.19 226 1 12 12 18 Elmwood Rehabilitation 365 64,490 132,170 507.05 204,134 559 341.68 137,557 377 25.39 10,222 28 30 30 19 Linear Technology 261 71,587 205,174 17.72 7,919 30 25.03 11,186 43 25.22 11,271 43 36 36 20 DS Waters of America 261 609 1,746 1.58 6 0 1.68 6 0 0.01 0 0 12 12 21 Magic Tech & Headway Tech 261 38,085 109,156 449.42 106,852 409 4.83 1,148 4 1.63 388 1 12 12 22 Lucky Pure Water 365 838 1,717 130.00 680 2 80.00 418 1 11.00 58 0 6 6 23 Milpitas Materials 365 74 151 130.00 60 0 80.00 37 0 11.00 5 0 6 6 24 Union Pacific Railroad 261 1,254 3,595 180.00 1,409 5 280.00 2,192 8 - - - 12 12 25 Cisco 261 53,232 152,568 30.00 9,969 38 15.00 4,985 19 30.00 9,969 38 30 30 26 Total 2,788,067 6,123,381 5,049,408 14,291 3,942,349 11,001 509,475 1,462 157,187 91,675 Volume CustomerNH3TSSBOD
664
Item # 22.

50 CITY OF MILPITAS

10.3. Revenue Requirement
Table 10-2 shows the rate revenue requirement for FY 2024 (also referred to as the test year or rate-setting year). The revenue requirement is split into operating and capital categories which are later allocated based on O&M expenses and capital assets, respectively. The expenses (Lines 1-4) are equal to FY 2024 expenses. The miscellaneous revenue (Line 6) includes interest earnings and miscellaneous revenues that are applied as offsets to the final rate revenue requirement. The contribution to reserves adjustment (Line 7) is equal to FY 2024 net cash change and represen ts the increase in the rate revenue requirement resulting from an addition to operating reserves and use of infrastructure reserves in FY 2024. All aforementioned values are from the proposed financial plan pro forma (

Table 9-8). The final rate revenue requirement (Line 8) is calculated as follows:

Total revenue required from rates (Line 8) = Revenue requirements (Line 5) + Other Revenues (Line 6) + Reserves (Line 7)

Table 10-2: FY 2024 Revenue Required from Wastewater Rates

10.4. Allocation of Expenses to Rate Components
After determining the revenue requirement, the next step of the COS analysis is to allocate O&M to the various rate components:

Line Description Operating Capital Total
Expenses
1 City O&M 7,467,505$ 7,467,505$
2 Wastewater Treatment 7,277,323 7,277,323
3 Debt Service 2,431,950 2,431,950
4 Rate Funded Capital 4,949,795 4,949,795
5 Subtotal 14,744,828$ 7,381,745$ 22,126,572$
6 Other Revenues (69,132)$ (69,132)$
7 Contribution to (from) Reserves 1,481,807$ 1,481,807$ 8 Revenue Required from Rates 16,157,503$ 7,381,745$ 23,539,248$ 665
Item # 22.

WATER AND WASTEWATER RATE STUDY 51

» Volume: Part of the potable O&M volume rate intended to recover costs associated with the quantity of contributed wastewater.
» BOD, TSS, and NH3: Recognizes the costs related to treating wastewater that vary with the level of pollutants in the water.
» ERUs: Costs that should be recovered by all customers equally in the bi-monthly fixed charge. An ERU is a single home, apartment, or commercial account – in the multifamily and mobile home classes, there are many ERUs per account.
» Customer: Part of the bi-monthly fixed charge that recovers the cost of providing customer service and billing. These costs are recovered from all customer accounts equally, regardless of their wastewater contributions or ERUs.

Table 10-3 shows the basis for allocating each O&M expense category to the various rate components. Most expense categories are allocated entirely to the corresponding cost causation component. The allocation basis for functional categories are as follows:

» Electricity: Primarily related to operating lift stations to convey wastewater. This costs scales closely with the quantity of wastewater contributed to the system.

» Wastewater Treatment O&M : Allocated directly to the corresponding volume and pollutant cost components in proportion to San Jose’s revenue requirement assigned to the City.

» Wastewater Treatment Capital: The City pays for a portion of San Jose’s capital costs based on a fixed capacity allocation rather than actual annual use. This capacity is approximately 2.5 times greater than the actual flow requirements of the City. Raftelis has allocated the costs associated with this unused capacity to the ERU cost component to be recovered from all customers equally. The remaining capital expense is allocated to the volume and pollutant components in the same proportion as the wastewater O&M expense, which corresponds to actual use patterns.

» Debt Service: The Series 2017 bonds are allocated according to the functional use of the Series 2006 bonds as determined by the City during the 2018 rate study. The Series 2019 bonds were issued in order to finance improvements at the San Jose reg ional wastewater treatment plant; therefore, this cost is allocated in the same way as the San Jose capital expense discussed above.

» Finance Administration and Fiscal Services: These costs are related to customer service, billing, and general financial services.

» Utility Engineering, Utility Maintenance, Compliance, City Capital, Contributions to Reserves, and other Non-Departmental: These are allocated to the Volume rate component. Many engineering, maintenance, and capital expenses are related to the size of the customer and their use of the wastewater system.

» Administration, Transfer to General Fund, City Attorney, and Misc. Revenue : These expenses and revenues are allocated to the General cost component, which is reallocated to all other rate components on Line 22.

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Item # 22.

52 CITY OF MILPITAS

Table 10-3: Wastewater Revenue Requirement Allocation

10.1.Customer Class Costs
Unit costs developed in Line 25 of Table 10-3 are used to distribute costs to each customer class based on their contributed wastewater volume, strength loadings, and ERUs. The Unit Costs are multiplied by the service units to derive the cost to each class for each cost component. The final columns of this table compare the proposed cost of service revenue from each class and the revenue from each class if all rates were increased by the same percentage amount. Note that the weighted average percent change is equal to the 4 percent rate adjustment determined in the financial plan above.

Line Cost Center FY 2024 Volume BOD TSS NH3 ERUs Customer General City O&M Expenses
1 Administration 1,690,087$ 100.0%
2 Utility Engineering 519,108 100.0%
3 Utility Maintenance 1,647,140 100.0%
4 Compliance 199,553 100.0%
5 Non-Departmental 859,196 100.0%
6 Electricity 310,000 100.0%
7 Finance Administration 25,769 100.0%
8 Fiscal Services 713,988 100.0%
9 City Attorney - 100.0%
10 Transfer to General Fund 1,502,664 100.0%
11 Subtotal City O&M 7,467,505$
12 Wastewater Treatment 7,277,323$ 33.3% 24.7% 21.4% 20.5% Debt Service
13 Series 2017 636,625$ 69.7% 13.5% 7.3% 9.5%
14 Series 2019 1,795,325 17.3% 12.9% 11.2% 10.7% 48.0% 15 Subtotal Debt Service 2,431,950$
Capital
16 San Jose Capital 3,875,286$ 17.3% 12.9% 11.2% 10.7% 48.0% 17 City Capital 1,074,509 100.0%
19 Subtotal Capital 4,949,795$
18 Contribution to Reserves 1,481,807 100.0%
20 Misc. Revenues (69,132) 100.0%
21 Subtotal Expenses 23,539,248$ 9,945,137$ 2,612,009$ 2,240,114$ 2,158,860$ 2,719,753$ 739,757$ 3,123,618$ 22 Reallocation of General 1,521,619$ 399,641$ 342,740$ 330,308$ 416,126$ 113,184$ (3,123,618)$ 23 Total Expenses 11,466,756$ 3,011,650$ 2,582,854$ 2,489,168$ 3,135,878$ 852,941$ -$ 667
Item # 22.

WATER AND WASTEWATER RATE STUDY 53

Table 10-4: Customer Class Cost of Service

Line Volume BOD TSS NH3 ERUs Bills
Total
Proposed
Revenue
Revenue at
Current
Rates
%
Change $ Change
1 Single-Family 4,251,886 998,280 1,112,220 1,129,518 1,505,407 694,484 9,691,795 9,367,460 3.5% 324,335 2 Multi-Family 3,167,958 743,790 828,683 841,571 1,454,429 105,274 7,141,705 6,950,622 2.7% 191,083 3 Mobile Home 137,682 32,326 36,015 36,575 62,364 167 305,129 244,703 24.7% 60,425 4 Schools/Colleges 143,935 17,573 15,060 32,774 8,253 3,849 221,446 191,976 15.4% 29,469 5 Motels and Hotels 287,949 83,832 36,456 15,299 3,123 1,457 428,116 435,697 -1.7% (7,581) 6 General Office 655,075 79,977 54,834 54,692 44,570 20,786 909,934 895,948 1.6% 13,986 7 City of Milpitas 53,546 6,537 4,482 4,471 4,681 2,183 75,900 78,027 -2.7% (2,128) 8 Service Stations 63,778 10,781 18,685 - 5,046 2,353 100,643 101,641 -1.0% (997) 9 Eat/Drink Establishments 494,060 579,990 289,492 37,499 20,543 9,580 1,431,166 1,194,489 19.8% 236,677 10 Convalescent Hosp/Daycare 57,413 12,401 5,106 6,536 2,873 1,340 85,670 87,712 -2.3% (2,043) 11 Personal Services, Laundrys 89,576 12,619 10,310 3,399 6,943 3,238 126,085 133,454 -5.5% (7,370) 12 Electrical/Electronics 584,967 16,481 9,181 133,197 12,254 5,715 761,794 749,218 1.7% 12,576 13 Machinery Manufacture 19,847 5,405 11,422 - 1,682 784 39,140 33,479 16.9% 5,661 14 RockTenn (Jefferson Smurfit) 16,392 26,890 681 2,128 120 56 46,266 44,841 3.2% 1,425 15 T. Marzetti Co. 88,837 129,755 2,896 276 239 112 222,116 240,313 -7.6% (18,197) 16 Prudential Overall Supply 55,569 30,438 15,654 641 239 112 102,654 87,506 17.3% 15,148 17 Evoqua Water Technologies 162,962 4,428 25,341 1,472 239 112 194,554 214,691 -9.4% (20,137) 18 Elmwood Rehabilitation 247,503 117,859 88,485 47,697 599 279 502,421 432,259 16.2% 70,162 19 Linear Technology 384,213 6,394 10,062 73,546 718 335 475,269 493,500 -3.7% (18,231) 20 DS Waters of America 3,269 5 6 0 239 112 3,631 4,007 -9.4% (376) 21 Magic Tech & Headway Tech 204,408 86,274 1,033 2,529 239 112 294,595 279,113 5.5% 15,483 22 Lucky Pure Water 3,216 393 269 268 120 56 4,322 4,597 -6.0% (275) 23 Milpitas Materials 283 35 24 24 120 56 540 554 -2.5% (14) 24 Union Pacific Railroad 6,731 1,138 1,972 - 239 112 10,192 9,547 6.8% 646 25 Cisco 285,701 8,049 4,484 65,054 599 279 364,167 358,539 1.6% 5,628 26 Total 11,466,756$ 3,011,650$ 2,582,854$ 2,489,168$ 3,135,878$ 852,941$ 23,539,248$ 22,633,892$ 4.0% 905,356 Customer Class Cost of
Service
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Item # 22.

54 CITY OF MILPITAS

11. Proposed Wastewater
Rates

Section 11 details the proposed water rate calculations. Proposed FY 2024 rates are calculated directly from the results of the COS allocations (from Section 10). All proposed rates beginning in FY 2025 are calculated by simply increasing the prior year's proposed rate by the annual revenue adjustment (from Table 9-11).

11.1. Proposed FY 2024 Fixed Meter Charges
Table 11-1 shows the detailed calculation of proposed FY 2024 Fixed Charges . The charge for the single family, multifamily, and mobile home classes recover the entire revenue requirement for these classes shown on Lines 1 to 3 of Table 10-4; these customers will not pay a volumetric charge. The rate is calculated by dividing the total cost by the number of billed bi-monthly ERUs.

Table 11-1: Proposed FY 2024 Fixed Charge Calculation

Line
Customer
Class Fixed
Charge Cost Bills / ERUs
Proposed
Rate Current Rate % Change $ Change
1 Single-Family 9,691,795$ 75,459 128.44$ 124.14$ 3.5% $4.30 2 Multi-Family 7,141,705 72,904 97.96 95.34 2.7% 2.62 3 Mobile Home 305,129 3,126 97.61 78.28 24.7% 19.33 4 Schools/Colleges 12,103 414 29.25 27.35 7.0% 1.90 5 Motels and Hotels 4,580 157 29.25 27.35 7.0% 1.90 6 General Office 65,356 2,234 29.25 27.35 7.0% 1.90 7 City of Milpitas 6,864 235 29.25 27.35 7.0% 1.90 8 Service Stations 7,399 253 29.25 27.35 7.0% 1.90 9 Eat/Drink Establishments 30,123 1,030 29.25 27.35 7.0% 1.90 10 Convalescent Hosp/Daycare 4,213 144 29.25 27.35 7.0% 1.90 11 Personal Services, Laundrys 10,180 348 29.25 27.35 7.0% 1.90 12 Electrical/Electronics 17,968 614 29.25 27.35 7.0% 1.90 13 Machinery Manufacture 2,466 84 29.25 27.35 7.0% 1.90 14 RockTenn (Jefferson Smurfit) 176 6 29.25 27.35 7.0% 1.90 15 T. Marzetti Co. 351 12 29.25 27.35 7.0% 1.90 16 Prudential Overall Supply 351 12 29.25 27.35 7.0% 1.90 17 Evoqua Water Technologies (Siemens Water Tech) 351 12 29.25 27.35 7.0% 1.90 18 Elmwood Rehabilitation 878 30 29.25 27.35 7.0% 1.90 19 Linear Technology 1,053 36 29.25 27.35 7.0% 1.90 20 DS Waters of America 351 12 29.25 27.35 7.0% 1.90 21 Magic Tech & Headway Tech 351 12 29.25 27.35 7.0% 1.90 22 Lucky Pure Water 176 6 29.25 27.35 7.0% 1.90 23 Milpitas Materials 176 6 29.25 27.35 7.0% 1.90 24 Union Pacific Railroad 351 12 29.25 27.35 7.0% 1.90 25 Cisco 878 30 29.25 27.35 7.0% 1.90 669
Item # 22.

WATER AND WASTEWATER RATE STUDY 55

11.2. Proposed FY 2024 Volume Charges
Table 7-2 shows the proposed FY 2024 Volume Charges. The costs for commercial classes are the sum of the volume and pollutant rate components shown in Table 10-4. This cost is divided by the amount of billable wastewater as previously shown in Table 10-1.

Table 11-2: Proposed FY 2023 Volume Charge Calculation

11.3. Proposed Five-Year Rate Schedule
Table 11-3 shows the proposed five-year schedule of water rates through FY 2027. Proposed FY 2024 Fixed Charges were calculated in the preceding subsections. All proposed rates beginning in FY 2025 are calculated by increasing the prior year’s proposed rate by the proposed annual revenue adjustment (from Table 9-11). Current FY 2023 wastewater rates (from Table 8-2) are also shown.

Line
Volume Charge
Calculation Cost Volume (hcf)
Proposed
Rate Current Rate % Change $ Change
1 Single-Family
2 Multi-Family
3 Mobile Home
4 Schools/Colleges 209,343$ 18,084 11.58$ 9.99$ 15.9% $1.59 5 Motels and Hotels 423,536 75,029 5.64 5.75 -1.8% (0.11) 6 General Office 844,579 122,054 6.92 6.84 1.2% 0.08 7 City of Milpitas 69,036 12,347 5.59 5.80 -3.6% (0.21) 8 Service Stations 93,245 16,618 5.61 5.70 -1.6% (0.09) 9 Eat/Drink Establishments 1,401,042 128,734 10.88 9.06 20.1% 1.82 10 Convalescent Hosp/Daycare 81,457 14,960 5.45 5.60 -2.8% (0.15) 11 Personal Services, Laundrys 115,904 23,340 4.97 5.31 -6.5% (0.34) 12 Electrical/Electronics 743,826 108,991 6.82 6.72 1.6% 0.10 13 Machinery Manufacture 36,674 3,698 9.92 8.43 17.6% 1.49 14 RockTenn (Jefferson Smurfit) 46,091 4,271 10.79 10.46 3.2% 0.33 15 T. Marzetti Co. 221,765 19,850 11.17 12.09 -7.6% (0.92) 16 Prudential Overall Supply 102,303 10,354 9.88 8.42 17.3% 1.46 17 Evoqua Water Technologies 194,202 30,363 6.40 7.06 -9.4% (0.66) 18 Elmwood Rehabilitation 501,544 64,490 7.78 6.69 16.2% 1.09 19 Linear Technology 474,216 71,587 6.62 6.88 -3.7% (0.26) 20 DS Waters of America 3,280 609 5.38 6.04 -10.8% (0.66) 21 Magic Tech & Headway Tech 294,244 38,085 7.73 7.32 5.5% 0.41 22 Lucky Pure Water 4,146 838 4.95 5.29 -6.5% (0.34) 23 Milpitas Materials 364 74 4.95 5.29 -6.5% (0.34) 24 Union Pacific Railroad 9,841 1,254 7.85 7.35 6.8% 0.50 25 Cisco 363,289 53,232 6.82 6.72 1.6% 0.10 670
Item # 22.

56 CITY OF MILPITAS

Table 11-3: Proposed Five-Year Wastewater Rate Schedule

WATER AND WASTEWATER RATE STUDY 57

11.4.Causes of Different Rate Changes
It is common in a cost of service study to have significantly different rate impacts for different customer classes.

Although it is difficult to precisely quantify differences between rate calculations from previous studies to this current study, there are a few general factors that contribute to the differential impacts:

1. Updated units of service: the contributed volumes and pollutant strengths have been updated since the 2018 study. This is particularly important for the individually monitored commercial customers whose strengths are continuously monitored. The units of service for each class as a proportion of the whole customer base are used to determine the proportion of the total costs.

2. Changes in expenses: the structure of the City’s expenses are significantly different in 2023 than in 2018.

For example, the San Jose capital expense is over three times larger than previously, resulting in a higher proportion of total City costs allocated to the pollutant components. This disproportionately affects customers with a higher than average estimated strength, all of which are commercial customers.

3. Updated methodology: Although the approach to calculating the previous rates was valid and justifiable, Raftelis believes that making several changes to the allocation process results in rates with a closer link to actual costs. These changes include the allocation of customer service and billing costs to customer accounts rather than ERUs, treating all City O&M expenses similarly rather than allocating a portion of them on a fixed ERU basis, and adjusting the recovery of the excess capacity portion of the San Jose capital expense.

11.5.Mobile Home Rate Subsidy
Following the completion of the 2018 rate study, the City determined that the proposed rates for mobile home customers would increase too sharply and implemented a transfer of funds from outside the utility in order to reduce the rate for these customers. The mobile home rate proposed above in Table 11-3 represents the full cost of service requirement for this class. If the City chose to do so, it could continue to provide a subsidy to these customers. Increasing the mobile home rate by 7.85% per year from FY 2024 to FY 2028 would bring these rates into alignment with the class cost of service requirement in FY 2028. The total subsidy over the study period is approximately $109 thousand7.

Table 11-4: Mobile Home Subsidy Option

7 Raftelis prepared this calculation at the request of the City and do not endorse this approach. We recommend the City adopt cost of service rates to ensure equity between customer classes, maintain compliance with generally accepted rate setting principles, and Prop 218.

Line Description FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 1 Subsidized Rate 78.28$ 84.42$ 91.05$ 98.20$ 105.91$ 114.22$ 2 % Rate Increase 7.85% 7.85% 7.85% 7.85% 7.85%
3 Revenue Recovered 244,703$ 263,911$ 284,627$ 306,969$ 331,065$ 357,052$ 4 COS Requirement 305,129$ 317,352$ 330,074$ 343,297$ 357,052$ 5 Annual Subsidy 41,217 32,724 23,105 12,233 - 6 Cumulative Subsidy 41,217 73,942 97,047 109,280 109,280$ 672
Item # 22.

58 CITY OF MILPITAS

12.Combined Bill Impacts and
Bill Comparison

Table 12-1 shows a combined bi-monthly bill for a single-family residential customer with a 5/8” meter using 14 hcf of water per billing period. The average annual increase to the total bill is approximately 5.3 percent per year.

Table 12-1: Combined Bi-Monthly Bill Impact

Figure 12-2 shows a comparison of sample Single Family Residential bi-monthly bills with several nearby utilities.

All bills are calculated based on a 5/8-inch or 3/4-inch water meter size and bi-monthly water use of 14 HCF.

Note that many of the other agencies shown are either scheduled or expected to implement rate increases in FY 2024. Many factors affect the cost of serving water by the agency. Some of these factors include:

1. Tax revenue – some agencies receive tax revenue substantially lowering the revenue required from rates,

2. Water sources – agencies who buy more imported water usually pay more for water compared to purveyors who pump groundwater,

3. Topography – hilly agencies will incur costs to pump water compared to agencies with flat topography,

4. System reinvestment – deferred investment in rehabilitation projects will keep rates low compared to agencies are investing in their system,

5. Age – newer systems are often in better shape than older systems and require less repair,

6. Size – smaller systems often have a higher cost per customer since they lack economies of scale.

WATER AND WASTEWATER RATE STUDY 59

Figure 12-1: Single Family Residential Water Bill Comparison with Neighboring Agencies

674
Item # 22.

60 CITY OF MILPITAS

Figure 12-2: Single Family Residential Wastewater Bill Comparison with Neighboring Agencies

675
Item # 22.

Water Utility Fund Reserve Analysis

676
Item # 22.

Water Proposed Maximum Rate / Charge Fee Schedule

677
Item # 22.

Water Bill Comparison for Single Family

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Item # 22.

Milpitas Assistance Program

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Item # 22.

CITY OF MILPITAS

AGENDA REPORT
(AR)

Item Title: Receive Staff Report on Draft Sewer Rates Study, Direct Staff to Proceed with Community Engagement on Proposed Rates, Including Identifying a Date for the Public Hearing and Mailing a Notice of the Public Hearing for the Proposed Sewer Rates (Staff Contact: Roger Lee, Interim Public Works Director, 408-586-2602; and Lauren Lai, Director of Finance, 408-586-3111)
Category: Community Services and Sustainable Infrastructure Meeting Date: 12/6/2022
Recommendation: (1) Receive staff report on Draft Sewer Rates Study; and (2) Direct staff to proceed with community engagement on proposed rates, including identifying a date for the public hearing and mailing a notice of the public hearing not less than 45 days prior to the hearing and find a CEQA exemption.

BACKGROUND:

The City of Milpitas owns, operates and maintains an extensive network of sewer system infrastructure (Sewer System). The Sewer System consists of 175 miles of pipeline and two pumping stations, which conveys an average rate of 6 -7 million gallons per day (MGD) to the Sa n Jose/Santa Clara Regional Wastewater Facility (RWF). The Sewer System serves approximately 15,350 customer accounts. The type and number of customers served are as follows:

Customer Type Approximate Number
Single family residence 12,450
Multi-family residence* 11,800
Mobile Home* 521
Commercial/Industrial/Institutional 950
* Multi-family are served by 1,950 customer accounts, mobile homes are served by three customer accounts.

The Sewer System discharges to the RWF operated by the City of San Jose. At the RWF, the discharge is treated and either released to the San Francisco Bay or recycled for industrial and irrigation purposes. The cost to customers of the Sewer System for treatment at the RWF is determined by a master agreement between the City and the RWF. Per the agreement, the City of San Jose bills the City of Milpitas for the treatment cost plus a share of the capital cost. Treatment costs are based on the annual volume of wastewater received by the RWF while capital costs are based on the treatment capacity that the City owns. The City has rights to discharge 14.25 MGD. This is approximately 8.5 percent of the total RWF treatment capacity of 167 MGD.

In accordance with State Regulations and Title 4, Chapter 3, Section 4.00 of the Milpitas Municipal Code, the City must review and set sewer rates and charges to ensure revenues cover all system operation and maintenance (O&M) costs and all capital improvement program (CIP) costs. It is important to note that the costs for the treatment of sewage are passed through from the City of San Jose to the Milpitas rate payers. Additionally, financial reserves for unforeseen events are targeted per the City’s financial reserve policy. Collection of revenues to offset the appropriate level of expenditures to ensure that the Sewer System is well maintained and adequately sized. For customers of the Sewer System, receipt of sufficient revenues ensures that system operation is efficient and reliable.

The analysis and setting of maximum sewer rates and charges must occur no less than every five years. Within these five years, staff annually reviews revenues and expenditures. If revenues a nd expenditures occur as expected, the maximum authorized rate for the upcoming year will be applied. Alternatively, if revenues and 680 Item # 23.

expenditures indicate the authorized upcoming rate is excessive, a lower rate may be applied. In no circumstances would sta ff increase rates above the maximum authorized amount without future City Council authorization and in accordance with the provisions of Article XIII D, Section (6)(b) of the California Constitution (commonly referred to as Proposition 218). City Council last adopted a five-year sewer rate and charge schedule in February of 2019. The first year of charges occurred in April 2019 and the fifth year ends on June 30, 2023.

A new five-year sewer rate and charge schedule is needed for an effective date beginning July 1, 2023.

In the preparation of proposing FY23/24 to FY27/28 sewer rates and charges, the City contracted with the financial consulting firm Raftelis to develop a Draft Sewer Rates Study (Study). The Study is a five-year modeling analysis with input s of financial projections of revenue requirements, expected expenditures, and in -depth analysis of proposed rates / charges so that revenues fully offset expenditures.

ANALYSIS:

The Study recommends increases to sewer rates and charges at an amount nece ssary to recover projected costs, including City of San Jose’s pass-through cost increases for treatment at the RWF and to maintain target reserve funds per policy. The rates and charges recommended will ensure the Sewer System meets or exceeds customer re quirements for reliable service, avoids operational deficits and the depletion of reserves and maintains favorable credit ratings to minimize potential future debt services costs.

Operating Costs:

O&M expenses for the Sewer System include O&M payments to RWF for treatment, staff costs and costs for services and supplies. Approximately 50% of the City’s O&M expenses are pass-through RWF treatment payments to the City of San Jose. Expected increases at the RWF for treatment and capital costs account for approximately 16% of the proposed five-year rate increases. Per the City of San Jose, FY23-24 RWF treatment costs are estimated at $7.3 million. For the five -year period (FY23-24 to FY27-28), the City of San Jose total RWF treatment costs amount to $39.4 million.

City operating costs are estimated to increase by 4% annually through FY27/28. This increase includes costs for support of remote monitoring / control of facilities. FY23/24 estimated operating costs are approximately $7.5 million. Expected increases in City operating costs account for approximately 14% to the proposed five -year increases. For the five-year period (FY23/24 to FY27/28) operating costs are estimated to total $40.5 million.

Capital Improvement Program:

On August 9, 2022, City Council adopted the 2022 Sewer Master Plan (Plan) which included recommendations for CIP projects through the year 2040. The CIP projects recommended in the Plan were prioritized based on existing conditions, completed asset renewal/replacement studies and completed risk/resiliency assessments.

High priority improvements were recommended for completion within the first five years, medium and low priority improvements are recommended for completion prior to 2040. Significant CIP projects programmed in the next five years (in 2022 dollars) include:

 Replacement or rehabilitation for assets or facilities. Projects include replacement of ageing pipes, and appurtenances ($6.4 million)
 Pipeline replacement and pump station improvements of Force Main A (FMA) ($26.1 million)  Detailed condition assessment of Sewer System (CCTV) ($2.1 million)

Due to the cost and impact on rates in FY23/24, some projects programmed in the Plan to begin design and construction in FY 23/24 are recommended to be delayed to FY 25/26. Increases in capital spending costs, including debt services, account for approxim ately 70% to the proposed five -year increases. For the five -year period (FY23/24 to FY27/28) City capital costs are estimated to total $ 34.6 million. The City’s share of capital costs for the RWF estimated by and passed through from City of San Jose for the same five-year period amounts to $30.1 million.
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FMA is a 50-year-old 30-inch diameter steel pipeline that conveys flows from the City to the RWF. The pipeline is one of two critical pipelines connected to the Main Lift Sewer Pump Station from which all discharges from the City are pumped. From the station, FMA crosses under Coyote Creek, through an easement on City of San Jose property under sludge drying beds and then ends at the RWF. The pipeline is in a corrosive environment and is approaching the end of its useful life. Due to these factors, Staff developed two options for the replacement of FMA.

Consistent with City Council discussion as part of the approval of the Sewer Master Plan, the recommended option is the design of FMA starting in FY24/25 and construction in FY25/26. This scenario estimates cash funding of $6.1 million using sewer revenues and up to 30-year term bonding of $20 million. The estimated cost of FMA’s design and construction costs are preliminary and will change as design is completed and future bidding conditions. Unless significant unanticipated cost changes were to occur, proposed rates should not be upwardly impacted. Staff is recommending this option and proposed rates and charges have included these costs.

The alternative option is the design of FMA starting in FY27/28 and construction in FY28/29. This scenario is a no bond option and assumes all cash funding using sewer revenues. Delaying the project to FY28/29 and fully funding the project without bonds has several consequences. These include increased customer rates and charges, potential increased construction costs due to inflation and most significantly, increased risk of failure.

Failure of FMA, if it were to occur under or adjacent to the cree k would harm the environment and would be costly to repair. Additionally, failure of FMA would shift all discharge to Force Main B until FMA is repaired or replaced. Due to the size and alignment of the FMA, repairs or replacement timelines may extend beyo nd one or two years.

FY22/23 Ending Balance & Reserve Balance:

For FY22/23, the Sewer Utility Enterprise Fund is projected to have a total ending reserve balance of $42.3 million. $11 million of this amount is set aside per targets in the City’s financial reserve policy. The remaining $31.3 million will be used to fund the RWF costs, City O&M and CIP projects (including FMA), from FY23/24 to FY27/28. Reserve balance details are provided in attachment 2.

City costs to the RWF for treatment, O&M and CIP are a significant portion of total expenditures (approximately $70 million from FY23/24 to FY27/28). Current and future estimated operating surpluses and existing reserves in the Infrastructure Fund can fund these costs. In FY23/24, the City’s expenditures f or O&M and CIP are projected to exceed existing revenues. With the proposed rate and charge increase of 4% annually and issuance of a $20 million bond for FMA, the reserve targets in FY27/28 are $19.7 million. Capital reserve for emergencies will be $5.2M (100% of target level), rate stabilization reserves will be $3.5M (100% of target level), pension liability reserves will be $11M (no target level) and infrastructure (CIP) reserves will be $1.8M (90% of target level of “at least $2M"). Total Sewer Utility Enterprise Fund ending balance will be $21.5 million.

Proposed Rate Recommendations:

The City’s sewer rate and charge schedules allocate cost to different customer classifications equitably to their use of the Sewer System. Like how c urrent rates and charges are collected, the proposed rate and charges distribute costs to volume, strength (determines how much treatment is required) and customer billing requirements.

Sewer System customers include both residential and non-residential customers. Residential customers include single-family, multi -family residential and mobile home parks. Non -Residential customers include all other commercial/industrial/institutional including offices, hotels, restaurants, schools and manufacturing.

The proposed rates and charges include a volumetric rate and a flat-fee charge to collect revenues sufficient to pay for expenditures necessary to operate the system, complete capital projects and pay for treatment.

Residential:
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Sewer rates for residential accounts are based on a fixed charge. All accounts within each of the three residential categories pay the same rate regardless of the amount of sewer discharged into the sewer system. The rate is based on how the City is charged by RWF assuming an average daily rate of discharge.

Non-Residential:

Sewer rates for non-residential customers include a fixed charge and a volumetric charge. The bi -monthly bills are based on contributed sewage flow, which is determined by multiplying metered water use per hundred cubic feet (1ccf=748 gallons) by a return factor of 90%. Volumetric rates for non -residential customers vary and are determined by how the City is charges by RWF for each customer type.

The proposed rate and charge amounts include increases for all residential and non -residential customers for both fixed and volumetric charges. The average annual increase percentages for each year for residential are shown below.

Fiscal Year Volume Charges Fixed Charge Average Bill Impact FY23/24 4.1% 4.0% 4.0%
FY24/25 4.1% 4.0% 4.0%
FY25/26 4.1% 4.0% 4.0%
FY26/27 4.0% 4.0% 4.0%
FY27/28 4.1% 4.0% 4.0%

If the proposed rate and charge amounts become effective on July 1, 2023, the bill for residential customers, in a bi-monthly period (typical customer), will increase in FY23-24 by the amounts as shown below:

Residential Customer Class Current Bi-monthly
Rate
Proposed Maximum
Bi-monthly Rate
FY2023-2024
Maximum Monthly
Increase
Single-Family Residential $124.14 $128.44 $2.15
Multi-Family Residential $95.34 $97.96 $2.62
Mobile Home Park $78.28 (Subsidized) $97.61* $19.33
*Mobile home rate without subsidy.

City Council, as part of the 2019 rate setting process, authorized a mobile home subsidy which averaged to $18.43 bi-monthly and $222,000 cumulative total from FY18/19 to FY22/23. Based on how the City is charged by RWF for mobile homes, if the c urrent subsidy was to end, the bi-monthly charge to mobile home customers would increase 24.7% (an additional $19.36 bi-monthly).

To avoid a large increase to mobile home customers, a cumulative FY23/24 to FY27/28 subsidy totaling $109,481 from utility late fees is recommended. To achieve this, a series of 7.9% increases is proposed that would result in a bi-monthly increase of $6.15 in FY23/24 increasing to $8.29 in FY27/28.

Mobile Homes (Bi-
monthly)
FY22/23
(current
rate)
FY23/24 FY24/25 FY25/26 FY26/27 FY27/28
Subsidized Rate $78.28 $84.43 $91.06 $98.21 $105.93 $114.22 * Rate Increase - 7.9% 7.9% 7.9% 7.9% 7.9%
$ Change $6.15 $6.63 $7.15 $7.72 $8.29
Cumulative Subsidy
Amount - $41,285 $74,073 $97,224 $109,481 $109,481
*Mobile home rates and charges will approximate multi-family rates and charges.

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The proposed maximum rate and charge five-year fee schedule for all customers are included in attachment #3.

A comparison of current rates, proposed rates and the amounts cha rged by other agencies are included in attachment #4.

Rate Subsidy Program:

Sewer funds collected as fees and penalties and American Rescue Plan Act (ARPA) funds, administered by the City, are available to eligible customers through the Milpitas Assistance Program (MAP). Currently, customers do need to have their own separate water meter to be eligible. All mobile home parks and some multi-family units in the City have one master water meter that serves multiple residents. For these customers, their homeo wner association then bills its’ residents for sewer through homeowner association fees. Staff is investigating how to provide the MAP to these residents.

For eligible residents, the amount of discount varies based on eligibility requirements of four tier s. In FY21/22, the number of enrolled customers for both water and sewer was 211. Average discount amount for both water and sewer was $22 bi-monthly ($132 annually). Information regarding MAP is included in attachment #5.

Aside from MAP, public agencies providing sewer service may implement low-income sewer rate assistance programs, but rate discounts must be funded from non-rate sources of revenues.

Proposition 218 Noticing and Community Engagement:

Sewer Service fees and charges are subject to these procedural requirements. Pursuant to Article XIII D, section 6, the City is required to hold a public hearing to consider the proposed sewer service rates, fees, and charges.

Additionally, the City is required to provide ratepayers and property owners with a written notice of the proposed rate increases, and the date, time and location of the public hearing on the proposed rate increase. Subdivision (a) of Section 6 of the California Constitution’s Article XIII D requires that 45 days must elapse from the time the notices are mailed until the public hearing on the proposed rate increases. Any property owner may submit a written protest of the proposed increase. Only one protest per parcel will be counted. If a majority of parcels submit protests, the City cannot adopt the proposed rates.

Staff will prepare the notice and will ensure it is user friendly and easy to understand. The notice will include a full description of all proposed maximum rates and charges for FY23/24 through FY27/28, the reasons for and the basis upon which the rates and charges are calculated, an explanation of the process, and a description on how to participate in the process. With Council’s authorization to proceed with a notice, a special mailing notifying property owners and ratepayers of the pr oposed increase to the City’s sewer service rates, fees and charges will begin.

The Draft Sewer Rates Study will be finalized by March 2023 prior to the public hearing on the proposed rates.

In the interim, staff will conduct community meetings and a pub lic workshop on the proposed rate and charge increases in January 2023.

Staff will host a series of workshops to help customers better understand the budget and infrastructure challenges facing the Sewer System including but not limited to, what services are paid for by sewer rates, what the proposed sewer rate and charge increases fund and why the City is proposing sewer rate and charge increases. The locations of the workshops will be included in the notice. Additionally, staff will establish a dedicated webpage on the City’s website and include a frequently asked questions section and other pertinent information. The information will be posted to allow for the translation into over 100 languages utilizing the built- in Google Translator tool. Staff will also post information about the workshops on the City’s social media accounts (i.e., Facebook, Nextdoor, Twitter). The proposed schedule for the notification, community meetings, public workshops, and public hearing is below.

Date Meeting Action
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December 6, 2022 City Council Council Consideration to
issue Prop 218 Notice
January – February
2023

Community Meetings and
Public Workshop
Community Outreach
March 7, 2023 City Council Public Hearing at Milpitas City Hall. Council consideration of
proposed sewer rates

May 9, 2023 City Council FY 2023-24 Operating
Budget Study Session
June 5, 2023 City Council Public Hearing and FY 2023-
24 Budget Adoption
July 1, 2023 New FY23/24 rate
implementation date.

POLICY ALTERNATIVE(S):

Alternative 1: Do Not Accept Sewer Rates Study and Defer Community Engagement and Notification on Proposed Rate Increases
Pros: The existing sewer rates would remain in place.

Cons: This action would delay community engagement efforts and delay action on adjusting sewer rates and charges.

Reason for Not Recommending: Financially, no-action to ultimately increase rates and charges will result in revenues falling below what is needed . This would result in the delay of construction of priority capital improvement projects, such as FMA. Delaying FMA would further extend its risk for failure. Additionally, customer requirements for reliable service would not be met. By FY25/26, operati ng reserves would fall below policy level and the Sewer System will not generate sufficient revenues after the City pays RWF obligations without impact to the General Fund. Subsidy of mobile homes would not be recommended. All reserves would be depleted by FY26/27 and future credit ratings would be impacted.

FISCAL IMPACT:

If the Proposition 218 majority protest process is concluded without a majority protest and the sewer rate adjustments are adopted as presented, the new sewer rate and charges would g enerate enough revenues for the next five years to meet or exceed customer requirements for reliable service, avoid operational deficits, depletion of reserves and maintains favorable credit ratings to minimize potential future debt services costs. A total late fee (Fund 109) utility subsidy in the amount of $109,481 will be needed to supplement mobile home customers from FY23/24 to FY 26/27.

California Environmental Quality Act (CEQA):

This action is exempt from CEQA as there will be no physical change to the environment.

RECOMMENDATION:

1. Receive staff report on Sewer Rates Study.

Attachment(s):

1. Draft Sewer Rates Study – December 2, 2022

2. Sewer Utility Fund Reserve Analysis

3. Sewer Proposed Maximum Rate / Charge Fee Schedule

4. Sewer Bill Comparison for Single Family

5. Milpitas Assistance Program 685
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Draft Water and Wastewater Rate Study
Study Report / December 2, 2022
City of
Milpitas, CA
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445 S Figueroa St, Suite 1925
Los Angeles CA 90071

www.raftelis.com

December 2, 2022

Mr. Harris Siddiqui, PE
Principal Engineer
City of Milpitas
455 East Calaveras Boulevard
Milpitas, CA 95035

Subject: Water and Wastewater Rate Study

Dear Mr. Siddiqui,

It has been a pleasure working with you, and we thank you and other City staff for the support provided to Raftelis during this study.

Sincerely,

Todd Cristiano
Project Manager
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