CITY OF
RIVERSIDE
City Council Memorandum
City of Arts & Innovation
....................... ....
TO: HONORABLE MAYOR AND CITY COUNCIL DATE: OCTOBER 4, 2022 FROM: PUBLIC WORKS DEPARTMENT WARDS: ALL
SUBJECT: UPDATE ON THE WASTEWATER FINANCIAL MODEL
ISSUES:
Receive an update on the Wastewater Financial Model, approve the capital project funding approach outlined, and authorize the use of settlement revenue funds to fund sewer capital projects.
RECOMMENDATIONS:
That the City Council:
1. Receive an update on the Wastewater Financial Model;
2. Approve the City of Riverside Wastewater Master Plan Technical Memorandum - Summary of Financial Model Update dated July 2022;
3. Approve in concept Option 1 City of Riverside Wastewater Master Plan Technical Memorandum - Summary of Financial Model Update dated July 2022;
4. Define as a Sewer Enterprise Fund Reserve Policy "Reserve Goal" an annual Reserve Ending Balance of at least the Policy Minimum Reserve Target plus 10%;
5. Authorize the use of Sewer Enterprise Fund Reserves above the "Reserve Goal" to fund Capital Improvement Projects through Fiscal Year 2026/27;
6. Authorize the use of $15,000,000 in Jurupa CSD Settlement funds for capital projects outlined in this report; and
7. Direct staff to finalize the 2019 Wastewater Master Plan Volume 8 - Financial Plan and User Rates and Fees based on the Wastewater Financial Model Update and return to the City Council for consideration.
Wastewater Financial Model Update • Page 2
COMMITTEE RECOMMENDATION:
The Mobility and Infrastructure Committee (Committee) met on Thursday, August 11, 2022 to receive an update on the Wastewater Financial Model. After discussion, the Committee voted unanimously to recommend that the City Council consider and approve the items listed in the Recommendations section of this report.
BACKGROUND:
The City of Riverside Public Works Department, Wastewater Division, is responsible for the collection, conveyance, and treatment of wastewater for over 93,000 customers within City limits.
The facilities consist of over 800 miles of gravity sewers, 400 miles of City laterals, 20 wastewater lift stations, 16,000 sewer manholes, and the Riverside Regional Water Quality Control Plant (RWQCP) which has the capacity to treat 46 million gallons per day. Additionally, under agreements with the City, the RWQCP provides wastewater treatment for the Edgemont, Jurupa, and Rubidoux Community Services Districts and the unincorporated community of Highgrove.
The City Council has historically approved contracts and policies to help the RWQCP provide dependable sewer service to City of Riverside customers. Table 1 provides a summary of notable City Council actions impacting the RWQCP during the past 8 years.
Table 1 - City Council Actions Impacting the RWQCP in the past 8 Years Item Date Description
City Council adopted the CIP and Rate Development Study for fiscal years 2014/15 1 May 2014 through 2018/19. The Sewer service rate included 8.5% increases per year in monthly service charges for residential and commercial customers.
The City and Jurupa Community Services District agreed that the City would 2 Dec. 2015 provide an additional 1 million gallons per day of wastewater treatment capacity for $15 million. Jurupa also agreed to pay $287,500 per year to fund capital facilities.
City Council adopted a Sewer Enterprise Fund Reserve Policy establishing 3 Nov. 2016 guidelines to ensure fiscal stability of the Sewer Fund and provide guidance to staff in the financial management of the Wastewater Division operations.
Dec. 2016 City Council awarded a professional consulting services contract to Carollo 4 Engineers, Inc. to complete an update of the 2008 Wastewater Master Plan.
City Council rescinded the FY 2018/19 residential and commercial 8.5% annual increase. Recommended that the sewer reserves be held closer to the minimum 5 Dec. 2017
values rather than the targets set forth in the Sewer Enterprise Fund Reserve Policy, though no set reserve level was established at the end of deliberation.
City Council approved the 2019 Integrated Master Plan for Wastewater Collection and Treatment Facilities (Wastewater Master Plan) with the exception of 6 Jul. 2020 Volume 8 - Financial Plan and User Rates and Fees. Staff was directed to return to City Council for consideration of Volume 8 following completion and an update to the Wastewater Financial Model.
City Council approved the Public Works Renewable Resources Management Plan 7 Aug. 2020 to respond to evolving regulatory demands, pursue operational efficiencies, and address climate change and sustainability initiatives identified in the Master Plan.
Wastewater Financial Model Update • Page 3
The contract with Carollo Engineers, Inc. was extended to June 30, 2023, in part to 8 Feb. 2022 evaluate the five-year sewer service rate plan, review current fund balances, budgeted and projected operating expenses and revenue, capital improvement costs, and help prepare projects to inform alternatives to fund the proposed CIP.
To support financing of prior wastewater capital improvements, the City has two outstanding Sewer Fund Bond Issuances with $354 million in outstanding par, secured by net revenues of the Sewer Enterprise Fund. These include the 2015 Sewer Revenue Bonds and the 2018 Refunding Bonds which refinanced the City's 2009B Direct Pay Build America Bonds. The 2018 refinancing has resulted in annual savings between $3.0 - $5.7 million, which to date total almost $20 million in savings.
DISCUSSION:
The Public Works Department maintains a Wastewater Master Plan which provides a comprehensive evaluation of the City's wastewater system; the most recent was updated in 2019.
The resulting Capital Improvement Program (CIP) project listing therein has two components: the Regional Water Quality Control Plant (Treatment) and the wastewater collection, conveyance, and pumping system (Collections).
Due to a present need to advance critical Wastewater Master Plan and Renewable Resource projects, the Public Works Department requested an update of the existing Wastewater Financial Model. The goal was to evaluate current fund balances, budgeted and projected operating expenses and revenues, budgeted CIP costs, and consider scenarios to fund the CIP through FY 2026/27. The technical consultant was provided specific direction to ensure the update:
1. Reflected current economic conditions
2. Focused foremost on options which reduced pressure on rates and reserves
3. Forestalled any potential rate increases
4. Maintained reserves at or above a reserve goal equal to the minimum Sewer Enterprise Fund Reserve Policy (Reserve Policy) amount plus 10%
5. Provided sufficient funding for the CIP
Since adoption of the Reserve Policy, City Council directed staff to hold reserves closer to the Reserve Policy minimum rather than targets. To codify this direction in the Financial Model Update and future financial planning, the technical consultant defined a "Reserve Goal" as an amount equal to the Reserve Policy minimum plus 10-percent. Defining a goal allows for a greater share of reserves to be used to fund capital projects, but still maintains a financial buffer in the event revenues do not materialize as projected or unforeseen costs arise. The Reserve Goal was considered across all projections in the Financial Model Update and utilized as a basis to evaluate the feasibility of each proposed scenario. For FY 2022/23, the Reserve Goal is $38.5 million, and increases each year thereafter in sync with increases in O&M costs, projected capital costs, and projected debt service.
Ongoing FY 2021/22 and Budgeted FY 2022/23 Capital Improvement Projects Since the FY 2018/19 sewer rate increases were rescinded, projects have been funded on a "pay- as-you-go" basis utilizing the Sewer Enterprise Fund cash balance less reserves. As those funds have nearly all been allocated to current projects, the Wastewater Division is at a point where CIP needs are beyond the means of remaining fund balances. This point is evidenced in the disparity of the adopted FY 2022/23 and 2023/24 CIP budgets of $2.3 million and $1.6 million, respectively, Wastewater Financial Model Update • Page 4
in comparison to $14 million and $22 million for FY 2020/21 and FY 2021/22. Attachment 1 highlights a selection of the ongoing FY 2021/22 and current FY 2022/23 projects.
Critical Projects - RWQCP
Additional investments are needed at the RWQCP to replace aging infrastructure, construct resource recovery projects, food waste to energy facilities, utilize renewable natural gas, and to meet developing regulatory requirements. Attachment 2 details a needed investment of $23.4 million to fund 11 RWQCP projects over the next five years. Attachment 2 shows available funding for each project and that all are critically underfunded.
Critical Projects - Wastewater Collection System
Additional investments are also needed across the collections system. 68% of the City sewer system was installed prior to 1980, with 53% installed between 1951 and 1980; thus, the latter in service anywhere from 42-71 years. Attachment 3 details critical wastewater treatment projects, current funding, and the outstanding funding need for each.
Pump stations move wastewater to higher elevation so it can flow via gravity to the treatment plant; they are high-risk points for large sewer spills should they fail. As part of the 2019 Master Plan the condition of the City's largest sewer pump station, Pierce Street, was assessed. Several areas of the 52-year-old station were found to be at "poor" or "worst" condition. Due to geographic constraints, the assessment noted many issues could not be easily or fully remedied and reasoned a complete rebuild of the station may be needed.
The Sewer Enterprise Fund Reserve Policy establishes that to the extent that Unrestricted- Undesignated Reserves are above the target levels, the Council has the flexibility to direct staff to utilize those available funds to pay for capital projects thereby reducing the need for future debt, pay down unfunded liabilities such as pension obligations, buy-down outstanding debt, reduce rates, or fund other wastewater strategic objectives. No other action by the Wastewater Division would be required if reserves are between the minimum and maximum level unless directed by City Council.
The Public Works Department initially requested the update of the Wastewater Financial Model in early 2022 with the goal of incorporating its results into the five-year financial plan presented to the City Council during its FY 2022-2024 budget deliberations. Due to a rapidly changing financial climate in the Spring of 2022, staff requested the consultant rerun the model to better reflect current conditions, including increased inflationary and supply chain pressures, etc. The results are presented and discussed below. Future updates of the five-year financial plan will reflect direction provided by City Council following this discussion.
The Financial Model Update analysis tested the financial and rate impacts of two options for utilizing the Jurupa Settlement Funds initial payment of $15 million, evaluated Sewer Enterprise Fund Reserve Policy minimum and target levels, and sought to determine when rate increases would be required to address the CIP funding need. The four scenarios evaluated are described in detail below.
Base Case Projection (Option O)
The Base Case Projection (Option 0) assumes no future rate increases, no new bonds issued, and Jurupa settlement funds refunded to customers and not used to fund capital projects. This scenario was not considered viable as reserves would fall below the Reserve Goal in FY 2024/25 and would require significant cuts to capital improvement projects to retain a positive balance. Under this scenario, reserves would be almost entirely depleted in FY 2026/27 Figure 1: Base Case Projected Reserves without Rate Increases or New Debt Wastewater Financial Model Update • Page 5
RESERVE ENDING BALANCE
$100
Millions $90
$80 $89.34
$70
$71.71
$60 $67.60
$50 $54.06
$40 ....
$41.36
$30
$20 $26.25
$10
$7.89
FY 2020/21 FY 2021/22 FY 2022/23 FY 2023/24 FY 2024/25 FY 2025/26 FY 2026/27 1 Ending Cash Balance - Minimum Reserves per Policy
• Target Reserves per Policy ••••• Reserve Goal - Minimum Reserve plus 10% Option 1 - Decreased Pressure on Rates and Reserves
Option 1 would utilize the full $15 million in Jurupa Settlement Funds to pay for capital projects, decreasing pressure on rates and reserves. Based on projections, reserves would be drawn down to fund capital projects in the near-term before stabilizing near the Reserve Goal. The forecast assumes that the City resumes implementing a sewer rate increase beginning in FY 2024/25 at a level of 4% per year. The proposed rate increases would be just sufficient to maintain the reserve balance around or just above the Reserve Goal through FY 2026/27. Debt coverage would be sufficient in all years with revenue only debt coverage exceeding the 1.10x requirement set forth in the 2018 bond agreements.
Figure 2 - Option 1 Projected Reserves for 4% Rate Increase in FY 2024/25
RESERVE ENDING BALANCE
$100
Millions $90
$80 $89.34
$70
$71.71 $70.60
$60
$50 $60.06
$52,96
$40 $46.20 $46.32
$30
$20
$10
$0
FY 2020/21 FY 2021/22 FY 2022/23 FY 2023/24 FY 2024/25 FY 2025/26 FY 2026/27 • Ending Cash Balance • Minimum Reserves per Policy
• Target Reserves per Policy • • • Reserve Goal - Minimum Reserve plus 10% Option 2A -Refund Plus 4% Rate Increase Starting FY 2024/25 Option 2A would maintain the proposed 4% per year rate increases starting in FY 2024/25 while also refunding $15 million in Jurupa Settlement Funds to City customers. Based on projections, reserves would be drawn down to fund capital projects over the next several years, reaching a minimum of $34 million in FY 2025/26, approximately $8.3 million below the Reserve Goal for that year. The 4% rate increases starting in FY 2024/25 would not make up the deficit. Reserves would Wastewater Financial Model Update • Page 6
remain below the Reserve Goal through at least FY 2026/27. Debt coverage would be sufficient in all years. Compared to Option 1, additional use of funds for capital and additional bond funds would be required due to the lack of Jurupa Settlement Funds for projects.
Figure 3 - Option 2A Projected Reserves with 4% Rate Increases Starting in FY 2024/25
RESERVE ENDING BALANCE
Millions
$89.34
$71.71
$67.60
$54.06
$43.89
$40.43
$34.02
FY 2020/21 FY 2021/22 FY 2022/23 FY 2023/24 FY 2024/25 FY 2025/26 FY 2026/27 Ending Cash Balance - Minimum Reserves per Policy
- Target Reserves per Policy •••••• Reserve Goal - Minimum Reserve plus 10% Option 2B -Refund Plus 5% Rate Increases to Maintain Reserve Starting FY 2024/25 Option 2B would propose rate increases of 5% per year starting in FY 2024/25 to allow reserves to rebound above the Reserve Policy minimum through FY 2026/27. Based on projections, reserves would be drawn down to fund capital projects over the next several years, reaching a minimum of $36 million in FY 2025/26, approximately $6.4 million below the Reserve Goal for that year. As a result of the higher rate increases as compared to Option 2A, reserves would rebound above the Reserve Policy minimum through FY 2026/27. Debt coverage would be sufficient in all years. Compared to Option 1, additional use of funds for capital and additional bond funds would be required due to the lack of Jurupa Settlement Funds for projects.
Figure 4 - Option 2B Projected Reserves with 5% Rate Increases Starting in FY 2024/25
RESERVE ENDING BALANCE
$100
Millions $90
$80 $89.34
$70
$71.71
$60 $67.60
$50 $54.06
$40 $44.52 $44.55
$30 $36.00
$20
$10
$O
FY 2020/21 FY 2021/22 FY 2022/23 FY 2023/24 FY 2024/25 FY 2025/26 FY 2026/27 I Ending Cash Balance - Minimum Reserves per Policy
• Target Reserves per Policy • • Reserve Goal - Minimum Reserve plus 10% Wastewater Financial Model Update • Page 7
Based on the projected CIP for the RWQCP and the Collections System, totaling $71.4 million (escalated costs) over the course of the projection period (FY 2022/23 through FY 2026/27), and the projected expenses for the same period, annual rate increases of at least 4% per year starting in FY 2024/25, will be required during the projection period.
Table 2 - Options Summary
Option Refund to Rate Increase Impact
Customers*
Limited funds investment in needed capital projects.
Yes No Reserve fund would fall below the reserve goal by FY 2024/25
Yes, 4% annually Allocates the settlement funds into capital projects, 1 No starting in FY stabilizes the reserve balance goal, debt coverage would 2024/25 be sufficient in all years
Reserves would reach the minimum level in FY 2025-26,
Yes, 4% annually
2A Yes starting in FY approx. $8.3 million below the reserve goal. Would have to 2024/25 utilize additional funds including bond funds for capital projects.
Additional rate increase to allow reserves to rebound
Yes, 5% annually
2B Yes starting in FY above the Reserve Policy minimum through FY 2026/27. 2024/25 Would have to utilize additional funds including bond funds for capital projects.
*Jurupa $15 million Settlement Funds Refunded to Customer, Reduces Investment in CIP Utilizing the $15 million Jurupa Settlement revenues to fund capital projects (Option 1) would allow the City to fund the budgeted CIP over the next five years and defer rate increases for two more years, to minimum rate increase of 4% per year starting in FY 2024/25.
Although using the Jurupa Settlement revenues to refund City customers (Options 2A and 2B) would provide a one-time benefit to those customers, it would lead to the need for higher user rate increases and higher debt issuances in the future to fund capital projects and meet financial policies. Rate increases would need to be 5% per year starting in FY 2024/25.
Based on this analysis staff recommends that the most favorable approach for the City to pursue would be Option 1, which would include:
1. Authorizing use of the $15 million Jurupa Settlement Funds to fund capital projects;
2. Funding CIP projects up to $71.4 million over the course of the projection period (FY 2022/23 through FY 2026/27);
3. Maintaining current rates through FY 2023/24;
4. In support of this option, staff later requesting direction from City Council to begin the process of increasing rates starting FY 2024/25 to maintain reserves at the policy minimum plus 10% goal; and
5. Followed by issuing new bond proceeds supporting City Council approved new rates.
In addition to these items staff also recommends, in support of the Financial Model Update and future financial planning for the Sewer Enterprise Fund, that the City Council define as a Sewer Enterprise Fund Reserve Policy "Reserve Goal," an annual Reserve Ending Balance of at least the Policy Minimum Reserve Target Plus 10%.
Although this update discusses potential future sewer rate increases, none are adopted by approval of the recommendations herein. Rather, approval will direct staff to finalize the 2019 Wastewater Financial Model Update • Page 8
Wastewater Master Plan Volume 8 - Financial Plan and User Rates and Fees and return to the City Council for consideration and approval of Volume 8. Through its review and potential approval of Volume 8 and any proposed rate increases to fund the CIP therein, City Council would then direct staff to begin the rate setting process.
STRATEGIC PLAN ALIGNMENT:
This item contributes to Strategic Priorities 4 - Environmental Stewardship and 6 - Infrastructure, Mobility & Connectivity and the following goals:
Goal 4.1 - Rapidly decrease Riverside's carbon footprint by acting urgently to reach a zero-carbon electric grid with the goal of reaching 100% renewable energy production by 2040 while continuing to ensure safe, reliable and affordable energy for all residents.
Goal 4.2 - Sustainably manage local water resources to maximize reliability and advance water reuse to ensure safe, reliable and affordable water to our community.
Goal 4.4 - Implement measures and educate the community to responsibly manage goods, products and services throughout their lifecycle to achieve waste reduction outcomes.
Goal 4.6 - Implement the requisite measures to achieve citywide carbon neutrality no later than 2040.
Goal 6.2 - Maintain, protect and improve assets and infrastructure within the City's built environment to ensure and enhance reliability, resiliency, sustainability, and facilitate connectivity.
The item aligns with each of the five Cross-Cutting Threads as follows:
1. Community Trust - Maintaining the wastewater treatment and collections systems serves the public interest and supports clean water in the community and environment.
2. Equity - This effort supports clean water, public health, and resource recovery throughout the City.
3. Fiscal Responsibility - Provides a quality public service to all residents in a fiscally responsible way.
4. Innovation - The CIP incorporates modernizing aged facilities and implementing programs and other innovative technologies in support of operational efficiencies, addressing climate change and sustainability initiatives identified in the Master Plan.
5. Sustainability & Resiliency - Proper operation and maintenance of the wastewater system contributes to the sustainability of the City's and region's local water resources and environment.
FISCAL IMPACT:
The total fiscal impact of the action is $15,000,000. Sufficient funds are available in the Sewer Fund, Other Deferred Regulatory Charges account number (0000550-240000). After approval of Wastewater Financial Model Update • Page 9
this report, Staff will return at a later date to appropriate the funds to specific Sewer projects.
Potential future rate increases will be brought back to Council at a later date for approval and quantified at that time.
Prepared by: Gilbert Hernandez, Public Works Director
Certified as to
availability of funds: Edward Enriquez, Interim Assistant City Manager/Chief Financial Officer/City Treasurer
Approved by: Kris Martinez, Assistant City Manager
Approved as to form: Phaedra A. Norton, City Attorney
Concurs with:
huck ponder
Chuck Conder, Chair
Mobility and Infrastructure Committee
Attachments:
1. Ongoing FY 2021/22 Projects and Budgeted FY 2022/23 Projects
2. Critical Wastewater Treatment Plant Projects
3. Critical Wastewater Collection System Projects
4. City of Riverside Wastewater Master Plan Technical Memorandum - Summary of Financial Model Update - July 2022
5. Sewer Enterprise Fund Reserve Policy
6. Public Works Renewable Resource Management Plan
7. Presentation