TO: Mayor and City Council
FROM: Philippe Eskandar, City Manager
BY: Hillary Guirola-Leon , Finance Director
DATE: November 13, 2024
SUBJECT: AWARD OF PROFESSIONAL SERVICES AGREEMENT WITH
RAFTELIS TO CONDUCT A SEWER RATE STUDY IN THE
AMOUNT OF $52,949 & AWARD OF PROFESSIONAL
SERVICES AGREEMENT TO REVENUE & COST
SPECIALISTS (RCS) TO CONDUCT THE COST ALLOCATION
PLAN & CITYWIDE FEE STUDY IN THE AMOUNT OF
$29,750
STRATEGIC PLAN CRITICAL SUCCESS FACTORS
Fiscally Responsible and Transparent City Government
BACKGROUND
Long-term projections for the General Fund indicate that operating expenditures will exceed revenues, leading to operational deficits. In fact, without cost cutting measures implemented as a part of the Fiscal Year 2024- 25 budget, such a deficit would have existed this year as well. One strategy to address these shortfalls is to ensure the full cost recovery for services provided directly from the individuals or businesses who receive these services. Notably, per Proposition 218, public agencies may not charge fees for services that are higher than the estimated cost of providing the service.
Additionally, Section 16 of the Citywide Financial Policies adopted by Resolution R-18-08 state that, “The City shall employ the principles and practices of cost recovery for services in a manner consistent with generally accepted cost of services and cost allocation best practices.” Historically, the City of San Marino has conducted a citywide fee study and cost allocation plan approximately once every five years. This aids the City Steven W. Huang, DDS, Mayor
Gretchen Shepherd Romey, Vice Mayor
Tony Chou, Council Member
Calvin Lo, Council Member
Steve Talt, Council Member
Council in establishing cost recovery polices and setting fees for services in an equitable manner. One such example would be fees for building permits that are benefiting a private property owner. In this example, a common practice in cities is to charge the full cost of providing those services to the property owner so that other members of the community are not subsidizing the private benefit gained by the property owner.
While the City has had a practice of routinely conducting citywide fee studies, it has never conducted a study to identify potential revenue sources to fund the operation and maintenance needs of the City’s 50-mile sewer collection system that every property in the City benefits from in some way. As such, the City Council must decide annually on whether to allocate limited General Fund revenues for things like services to the community and public safety, or the maintenance of the sewer system.
On July 30, 2024, the City submitted a Request for Proposals for the City-Wide Fee Study and Sewer Rate Study. The RFP process closed on September 6, 2024.
City-Wide Fee Study
The City received two proposals for the User Fee Study: Revenue & Cost Specialists (RCS) at $29,750 and Matrix Consulting Group at $30,000. Based on their lower bid and staff’s positive past experience with RCS, staff recommends awarding the contract to Revenue & Cost Specialists.
Sewer Rate Study
Additionally, the City manages a 50-mile sewer collection system that requires ongoing maintenance and capital investment. The latest projections for operating and capital improvement costs are estimated at $35.5 million over the next 11 years and are currently unfunded. The City does not currently charge for sewer services, relying instead on General Fund revenues. An analysis is needed to identify revenue sources for maintaining and improving the sewer system.
The city received two proposals for a Sewer Rate Study: Raftelis at $52,949 and Black & Veatch at $45,725. Raftelis’ proposal includes the preparation of the Proposition 218 notice. Black & Veatch’s proposal does not cover this, requiring an additional cost of $4,000 for the notice preparation.
While both consultants are highly qualified, staff recommends Raftelis for their specialized expertise and tailored strategies for the City of San Marino. This will be San Marino's first Sewer Rate Study, making clear communication of the study results crucial. Staff found that Raftelis excels in explaining the study results and produces user-friendly reports.
DISCUSSION
General Fund Overview and Projections
During the FY 2024-25 budget process, a 5-year projection was prepared for the General Fund. Projections indicate that the General Fund’s operating expenditures are expected to outpace revenues, leading to operational deficits. One strategy to address these shortfalls is to ensure cost recovery of services provided directly to individuals or businesses. Charging user fees so that recipients of direct services pay their fair share of said services, reduces the need to rely on the General Fund and ensures funding is available to continue to provide those services.
As previously mentioned, a User Fee Study aligns with the Citywide Financial Policies Resolution R-18-08, Section 16, which states that “the City shall employ principles and practices of cost recovery for services in accordance with generally accepted cost of services and cost allocation best practices.” User Fee Study
The goal of a User Fee Study is to better align fees with the true cost of providing a service. It is best practice to periodically review fees, usually every 5 years, to ensure cost recovery and reduce uneven impacts. The City conducted its last User Fee Study in 2020 with fees being effective September 1, 2021. Periodic review of fees also encourages transparency in the process and shows the relationship between the fee and the cost of providing the service.
On July 30, 2024, the city sought proposals for a cost-of-service analysis and received two proposals listed below:
Proposal Amount
Revenue & Cost Specialists
Proposal (RCS)
$29,750
Matrix Consulting Group
$30,000
RCS's proposal includes a Cost Allocation Plan, which provides precise overhead cost allocations, whereas Matrix’s proposal would require additional costs for such a plan. Revenue & Cost Specialists (RCS) submitted a joint proposal with Raftelis and the proposal allows for separate contracts.
The City’s User Fee Study prepared on September 2020 was prepared by RCS.
RCS’s past experience with the City of San Marino’s fee study, will help create efficiencies in the process. Staff recommends awarding the contract to Revenue & Cost Specialists (RCS) due to being the lowest bidder and staff’s positive experience with RCS in prior studies.
Sewer Rate Study
The city operates a 50-mile long municipal sewer collection system and is responsible for collecting wastewater (sewage) and conveying it to the Los Angeles County Sanitation District for treatment. The Sewer system is a critical public infrastructure that needs proper maintenance and capital investment to meet safety regulations and continue operations.
In 2019, the City completed a Sewer System Master Plan (SSMP) and a Wastewater Collection System Condition assessment (WCSCA) to assess the system and begin steps toward improving the system. Priority projects were identified to ensure the sustained reliability of the sewer system and the rehabilitation of all three City-owned sewer lift stations were recommended.
The City has awarded and started the Lift Station Improvement Project in the amount of $2,276,000.
The costs projected in the WCSCA were updated in 2024 and are estimated at $35,487,000 for Operation and Maintenance (O&M) and capital improvements over the next 11 years. The projected costs are unfunded and a revenue source will need to be identified in order to maintain the system and invest in capital improvements.
Unlike most agencies, the city does not charge customers for the use of the sewer system. Currently, the wastewater collection system expenditures are funded with General fund revenues. Based on research conducted by staff, San Marino remains the only City in the region who funds, operates, and maintains their sewer system in this manner. The City was able to fund the Lift Station Improvements with one-time existing Capital Projects Fund reserves. However, this will not be possible moving forward given the growing need for capital improvements throughout the City.
Based on FY 2024-25 budget projections, the Capital projects fund started with a reserve balance of $15.7M as of 7/1/23 and is projected to end with a reserve balance of $76K on 6/30/25 due to the large number of projects currently envisioned or contracted for. Since, the General fund is the funding source for the Capital projects fund, an analysis is needed to identify revenue streams for the projected costs of operating and improving the sewer system.
As shown on table 1 above the investment needed to maintain and operate the Sewer system is a minimum of $2M each fiscal year and is currently unfunded.
A Sewer Rate Study is essential as it would be prepared by a third-party expert with special expertise in financial plans for Utility systems. The goal of the study is to identify the adequate funding necessary to maintain and operate a Wastewater system while also ensuring the Utility is financially sustainable in the long term. The rate study would also analyze potential sewer rates as a funding source to bridge the gap between system needs and funding sources.
Staff requested proposals for a Sewer Rate Study on July 30, 2024 and received the two proposals listed below. Raftelis’ submitted a joint proposal with RCS and the proposal allows for separate contracts. Raftelis’ proposal includes the preparation of the Prop 218 notice. Black & Veatch’s proposal does not include the Prop 218 notice preparation, and it would cost an additional $4,000.
Staff reviewed and evaluated both proposals. Both consultants have adequate experience to conduct a utility rate study but Raftelis stands out for their expertise. Raftelis demonstrates their knowledge and ability to guide the City to meet the objective of the project. Additionally, Raftelis has conducted a Wastewater rate study for various California cities with recent and ongoing sewer rate studies for the cities of Pasadena, Oxnard, El Monte, Ontario, Orange, San Clemente, Seal Beach, and Tracy.
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
FY 25-26 FY26-27 FY27-28 FY28-29 FY29-30 FY30-31 FY31-32 FY32-33 Sewer Rehabilitation and Repair Projects O&M costs
Sewer Capital and Operations Expenses Table 1
This would be the City of San Marino’s first Sewer Rate Study and communication of the results will be critically important. Staff reached out to references and Raftelis stands out because of their ability to explain the Sewer Rate study and meet with staff for questions throughout the project. Staff has also reviewed Study reports prepared by Raftelis and the reports are easy to follow with graphics and charts that complement the report.
Staff is recommending awarding the professional services agreement to Raftelis to conduct the Citywide User Fee Study.
FISCAL IMPACT & PROCUREMENT REVIEW
The User Fee Study is budgeted for FY 24/25 under account # 101-11-4150- 0000. The Sewer Rate Study is not currently in the FY 24/25 budget and requires a budget appropriation of $52,949.
LEGAL REVIEW
The City Attorney's office has reviewed and approved as to form.
RECOMMENDATION
Staff recommends the Council award a Professional Services Agreement with Raftelis to conduct a Sewer Rate Study in an amount not to exceed $52,949. and approve a budget amendment of $52,949 in the General Fund to cover the cost of the study.
If Council agrees with Staff’s recommendation a motion would be “I move to authorize the City Manager to execute a contract with Raftelis to conduct a Sewer Rate Study, in the amount not to exceed $52,949 and approve the FY 24/25 budget amendment to appropriate $52,949 in the General Fund.” Staff also recommends the Council award a Professional Services Agreement with Revenue & Cost Specialists (RCS)to conduct a Cost Allocation Plan and City-wide Fee Study in an amount not to exceed $29,750.
If Council agrees with Staff’s recommendation a motion would be “I move to authorize the City Manager to execute a contract with Revenue & Cost Specialists (RCS) to conduct a Cost Allocation Plan and City-wide Fee Study in an amount not to exceed $29,750.”
ATTACHMENTS
1. User Fee Study RCS Agreement
2. Sewer Rate Study Raftelis Agreement
3. Exhibit A Proposal
4. Exhibit B Cost Proposal