A Report from the City AuditorIssued February 2026http://www.sanjoseca.gov/auditorPresenters:Joe Rois, City AuditorAlison Pauly, Supervising AuditorEbelechukwu Obi, Senior Program Performance AuditorHiwad Haider, Program Performance Auditor IITransportation and Environment Committee Agenda Item (d) 41Sewer Rates:Reviewing Rate Model Assumptions and Developing Reserve Policies Would Improve the Rate-Setting Process Background
2 •The City sets sewer rates to recover the costs ofproviding sanitary sewer and wastewater treatmentservices to residents and businesses.•ESD sets rates based on the volume of a customer’swastewater and the concentration of pollutantswithin the wastewater.•All customers pay the same unit rate for eachwastewater component.•How a customer is billed depends on the type ofresidence or business and the assumed or actualvolume and strength of their wastewater.
Finding I: ESD Should Review Assumptions Within Its Rate Model 3 •In 2014, the state determined that the City’srate model complied with Clean Water StateRevolving Fund requirements.•A 2015 consultant study found that the strengthof wastewater reaching the RWF did not matchwhat was assumed in the rate model.•The study determined that the City shouldcontinue with the current strength parametersuntil field sampling occurs. Recommendations: T o ensure its rate model assumptions reflect current conditions, ESD should:Study assumptions in the rate model and update them as necessary.Update procedures around when assumptions should be reviewed. Consider implementing a software solution for rate calculations. 4 Finding 2: ESD Should Develop Formal Reserve PoliciesRecommendation: T o enhance risk management and planning for future needs, ESD should:Develop a formal policy for sewer fund reserves that defines their intended use and target levels.•The amount of funds held in reserves andunrestricted fund balance for the Sewer Serviceand Use Charge Fund has fluctuated over time.•ESD does not have a formal policy that definesthe intended purpose or sets target levels forreserves for the fund.•Formal reserve policies or practices are commonamong other wastewater utilities. 5•Consolidating procedures on the frequencyof wastewater sampling would improvetransparency for how bills are calculated forindustrial users.•ESD's sewer rate web page could beenhanced with clearer explanations of howrates are set.
Finding 3: ESD Can Improve Transparency Around the Rate-Setting ProcessRecommendations: T o improve transparency, ESD should:Document procedures for sampling decisions and notify users of changes as appropriate.Update the sewer rate web page and add clear rate setting explanations.
ConclusionThe report has six recommendations to improve the Environmental Services Department’s sewer rate-setting process.We would like to thank the Environmental Services Department for their time and insight during the audit process.The audit report is available at www.sanjoseca.gov/auditorAudit staff: Alison Pauly, Ebelechukwu Obi, Hiwad Haider6