Public Works Agency
www.santa-ana.org/pw
Item # 8
City of Santa Ana
20 Civic Center Plaza, Santa Ana, CA 92701
Staff Report
January 20, 2026
TOPIC: Water and Sewer Rates
AGENDA TITLE
Authorize Staff to Prepare Documents for Water and Sewer Rate Adjustments (Non- General Fund)
RECOMMENDED ACTION
Authorize and direct staff to prepare all required documents necessary to proceed with notification of proposed water and sewer rate adjustments in compliance with Proposition 218 requirements, including, but not limited to, the following:
a) Prepare and mail proposed rate adjustment notices to all Santa Ana property owners in compliance with Proposition 218 requirements; b) Schedule a public hearing at a future City Council meeting, on or after March 17, 2026;
c) Prepare all other documents required to proceed with water and sewer rate adjustments.
GOVERNMENT CODE 84308 APPLIES: No
EXECUTIVE SUMMARY
Water and sewer rates have not been adjusted since 2023. California law has evolved with new requirements to ensure equity among rate-payers. Costs have escalated faster than revenue, and the water and sewer enterprise fund balances have decreased to unacceptable levels. To ensure service delivery, compliance with law, and maintain the City’s credit rating, staff is recommending rate increases based on a water and sewer rate study. If the recommended rates are approved at a public hearing in the future, the typical single-family residential bill (water and sewer combined) will increase by about $7 per month. Postponing a rate increase will necessitate a larger increase later, and risk a credit rating downgrade. Even with the proposed changes Santa Ana customers will continue to pay a lower amount, on average, for water and sewer services than most other Orange County Cities.
Water and Sewer Rate Adjustment Authorization
January 20, 2026
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DISCUSSION
The Public Works Agency Water Resources Division (PWA) oversees and maintains the daily operations of the City’s water and sanitary sewer systems. The water system comprises approximately 480 miles of water main, 21 groundwater wells, seven pump stations, 10 reservoirs with a storage capacity of 49 million gallons, four pressure- regulating stations, and seven connection points to the Metropolitan Water District (MWD). The system has an average daily demand of 30 million gallons from its roughly 45,500 metered service connections. The sanitary sewer system consists of approximately 400 miles of sewer main, 7,000 manholes, 46,000 sewer laterals, and two sewage lift stations. All sewage carried by the City’s sewer mains is conveyed to the Orange County Sanitation District for treatment. The cost to keep these critical assets operational and invest in their replacement comes from the water and sewer rates charged to and collected from the community they serve. The California Constitution, via Proposition 218, mandates that all revenue collected from water and sewer charges is solely used for water and sewer operations and infrastructure related expenses.
Background
The American Water Works Association recommends as a best management practice that public utilities periodically review and perform cost of service and rate studies every five years to adjust water and sewer rates annually thereby ensuring rate revenue is sufficient to cover the cost of operating and maintaining public water and sewer systems.
The City last performed a Cost of Service and Rate study in 2019. Based on this study, on November 19, 2019, the City Council adopted a 5-year rate plan for the City’s water and sewer services. The adoption of the 2019 rate plan has enabled the City to keep pace with increased operation costs and enable the City to compete critical infrastructure projects, including well rehabilitation, the addition of new wells, and the implementation of a smart water meter program.
The adopted 2019 rate plan established a series of annual rate adjustments with the last adjustment taking effect on July 1, 2023. Due to several compounding factors, including heightened community affordability concerns and the City’s desire to minimize additional financial burden during a period of economic uncertainty, water and sewer rates have not been adjusted in nearly three years. While this approach provided short-term rate stability, it has also deferred necessary adjustments needed to keep pace with rising operational, regulatory, and infrastructure costs. During this same time period, the costs for delivering Santa Ana’s award-winning drinking water and maintaining its sewer systems have increased significantly. In the past two years, both the Metropolitan Water Agency and the Orange County Water District, the agencies that supply and manage the region’s imported water and groundwater basin, have raised their rates by 15% and 22.1% respectively. As a result, the City’s expenditures for water supply and system operations have increased, while revenues have remained relatively flat, reducing the City’s capacity to fund capital improvements necessary to support long-term system performance.
Water and Sewer Rate Adjustment Authorization
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Additional capital improvements, including the emerging need for treatment facilities to remove Per- and Polyfluoroalkyl Substances (PFAS) from drinking water, as well as increased operating and maintenance costs, require a review of the current rate structure and enterprise finances. PFAS emerged as a known contaminant in recent years and in 2024 the Environmental Protection Agency adopted a maximum contaminant level requiring public water systems to treat and remove PFAS from drinking water. This new treatment requirement has added an unplanned significant increase in capital, maintenance, and operational expenses. Furthermore, 50% of the water distribution infrastructure is past its useful life and an estimated 70% will reach its useful life by 2040.
Similarly, the sewer system requires an average of four (4) miles of pipe replacement per year for the next 100 years, but currently, only about one (1) mile of replacement per year can be afforded.
Since Council last adopted a rate structure, there has been new case law regarding water and sewer rates, creating additional criteria for compliance with Proposition 218. The City’s rate structure must be adjusted to comply with existing requirements and ensure that rates are fair and equitable and do not subsidize or benefit one customer class versus another (for example, low-income rates or different rates for residential vs. industrial users are not allowed).
Based on the recommendations of the 2019 Cost of Service and Rate Study and the adopted rate plan, the City issued $44 million of bonds in 2024 to fund major capital improvement projects, including the Smart Water Meter Program and water well improvement projects. The City secured favorable financing terms based in part on its AA credit rating, as evaluated by S&P Global Ratings, and the existence of an adopted rate plan demonstrating alignment between revenues and expenditures.
In more recent years, operating expenses have continued to increase while revenues have remained relatively unchanged, reducing the utilities’ ability to build and maintain reserve balances necessitated by debt covenants and best practices. Maintenance of these balances is a key factor in ongoing credit evaluations. According to the most recent S&P publication from 2025, S&P affirmed the existing AA credit rating but revised the outlook from stable to negative.
To support long-term financial sustainability and continued compliance with Proposition 218, staff recommended hiring a consultant to prepare an updated cost-of-service and rate study. On May 20, 2025, upon the completion of a competitive procurement process, the City Council awarded a contract to Robert D. Niehaus, Inc. to perform a long-term financial planning and cost-of-service study for both the water and sanitary sewer enterprises (Study) (Exhibit 1). The objectives of the Study are to examine the City’s financial and strategic goals and, if necessary, develop and recommend a new rate structure to ensure the future financial stability of both water and sewer enterprises, while ensuring that the rates are in compliance with applicable law.
Water and Sewer Rate Adjustment Authorization
January 20, 2026
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The following are key elements and recommendations of the Study.
Capital Improvement Plan
Staff has determined that both the water and sewer utilities need significant investment in the repair and rehabilitation of its aging infrastructure. PWA has completed both a water and sewer infrastructure master plan which identifies critical projects that should be constructed over the next 15 years. The water and sewer systems are already showing signs of distress. In the past year alone, the systems experienced 23 water main breaks, 200 water service leaks, and 128 sewer lateral repairs. In addition, four (4) pump stations and 16 groundwater wells were downed due to mechanical and/or electrical failures.
While PWA made cost-effective repairs, continued deferral of capital project investment will eventually result in system failure and loss of critical assets. The proposed rate plan allows for the City to invest an average of $8 million annually on water capital improvements and $5 million annually on needed sewer capital improvements over the next five (5) years. Proposed projects include (Exhibit 2):
Water Facilities
oGarthe Pump Station Improvements
oWalnut Pump Station Improvements
oNew Groundwater Wells
oCrooke Pump Station Improvements
Water Main Improvements
oFisher Park Neighborhood Water Main Improvements
oHeninger Park Neighborhood Water Main Improvements
oThornton Park Neighborhood Water Main Improvements
oRiverview West Neighborhood Water Main Improvements
oMadison Park Water Main Improvements
Sewer Main Improvements
oWashington Square Sewer Main Improvements
oSanta Ana Memorial Park Neighborhood Sewer Main Improvements oWright Street and Old Grand Sewer Main Improvements
oWarner-Garnsey Street Sewer Main Improvements
oCasa Bonita Neighborhood Sewer Main Improvements
oRiverview West Neighborhood Sewer Main Improvements
Operations & Maintenance Plan
The water enterprise’s FY 2025/26 budget includes $73.5 million in operating expenses, of which $26.6 million is for the purchase of water supplies and $3.2 million is for the cost of electrical power to pump, treat, and distribute the water. Costs for wholesale water as well as electrical power are expected to continue climbing year over year.
Water and Sewer Rate Adjustment Authorization
January 20, 2026
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9 7
Maintenance of the City’s public water systems must adhere to strict standards set at both the State and Federal levels. Additionally, the presence of PFAS in the groundwater supplies has required unprecedented investment in PFAS treatment facilities, which will result in additional annual maintenance and operations costs for the City. Total operating expenses are expected to increase by approximately 4% each year, based on applying specific inflation factors to each budget line item. By the end of the five-year rate-setting period, total operating expenses are expected to reach $89.4 million. Without adjustments to revenues, sustaining current service levels over the planning period would be unsustainable.
The sewer enterprise’s FY 2025/26 budget includes $8.8 million in operating expenses.
Maintenance requirements of the City’s sewer system are generally steady and in accordance with the City’s adopted Sewer System Management Plan which is on file with the State. Total operating expenses are expected to increase by approximately 4% each year, based on applying specific inflation factors to each budget line item. By the end of the five-year rate-setting period, total operating expenses are expected to reach $10.7 million. At the current revenue rate, present service levels would be unattainable after fiscal year 2029 without completely depleting the reserve balance.
Financial Plan
The study examined revenue needs over the next 10 years, including expenditures for operations and maintenance, as well as anticipated capital improvements, for the water and sewer enterprises. The main inputs to the financial plan include operating expenses and inflation (including the cost of wholesale water and power), capital investment and funding sources, reserve targets, and debt service coverage requirements. The reserve policy for each utility includes the following three elements:
Operating Reserve – three (3) months operating expenses Capital Reserve – 50% of the average annual capital investment over 10 years (i.e. $4 million)
Emergency Reserve - $4 million to address unanticipated system needs Revenues for the water and sewer enterprises are not keeping pace with increasing operating costs. As a result, existing revenues do not provide adequate funding to support planned capital improvements or to build and maintain reserve balances at levels recommended by the consultant and consistent with generally accepted industry practices. Over time, this limits the utilities’ capacity to reinvest in aging infrastructure or to maintain reserve and debt coverage benchmarks typically reviewed in ongoing evaluations by S&P Global Ratings, which can influence future credit ratings and borrowing costs.
The study evaluated phased rate adjustments over a five-year period to address these longer-term needs. Under the proposed rate plan, both the water and sewer enterprises are projected to gradually build reserve balances, maintain appropriate debt service Water and Sewer Rate Adjustment Authorization
January 20, 2026
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coverage, and fund planned capital improvements in a manner that supports reliable service and long-term financial sustainability.
In brief, these recommended rates evaluated in the study are intended to:
Fully fund utility operations
oCosts to replenish the groundwater basin
oCosts to purchase imported water
oCosts for electrical power
Fund capital improvements
oFunds $8 million a year in average water capital spending oFunds $5 million a year in sewer capital spending
Contribute to healthy reserve balances
oEnsure the day-to-day operations of each enterprise will continue during emergencies
oPromote the future stability of each enterprise
Maintain debt service coverage requirements
oNet revenue must exceed 120% of debt payments each year Ensure our credit rating remains strong
Rate Design
Legal requirements surrounding water and sewer rate setting in California continue to evolve. In recent years the courts have made rulings with respect to California Constitution Article XIII (Proposition 218) that have created a higher “cost of service” standard for rate setting. Bottom line, the burden of proof is on the public water and sewer agencies to demonstrate that all aspects of water and sewer rates are directly proportionate to the cost of providing service. This means aligning fixed revenue (fixed charges) with fixed costs and variable revenue (usage rates) with variable costs, as well as ensuring rates for all customer classes are equitable.
The proposed water and sewer rates are structured to directly align with the water and sewer utility costs in a manner that fully complies with the current Proposition 218 requirements. Water usage rates are tied to the cost of purchasing water and electricity, while water fixed charges are aligned with the utility’s fixed costs such as maintenance and capital spending. Water usage rates will continue to be two-tiered, with Tier 1 water having a lower cost aligned with the cost of groundwater, and Tier 2 water having a higher cost aligned with the cost of imported water supplies. All customer classes will be charged under the same tier structure and the limit between Tier 1 and Tier 2 water usage will be based on water meter size such that, on average, water usage will be 85% on Tier 1 and 15% on Tier 2 across all customers.
Sewer rates are proposed to be fixed for all customers based on the size of their water meter, as the size of the water meter is proportionate to the amount of water returned to the sewer system.
Water and Sewer Rate Adjustment Authorization
January 20, 2026
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9 7
The table below shows the water and sewer revenue adjustments proposed in the Study to achieve the Capital Improvement, Operations and Maintenance, and Financial Plan objectives.
FY 25/26
& 26/27 FY 27/28 FY 28/29 FY 29/30 FY 30/31
Implementation Date May 1,
2026
July 1,
2027
July 1,
2028
July 1,
2029
July 1,
2030
Water Enterprise 9.0% 9.0% 9.0% 9.0% 8.0%
Sewer Enterprise 13.5% 13.5% 10.0% 10.0% 10.0%
Typical Bill Impact
The financial impact of the proposed revenue adjustments and rate structure changes on the typical customer was carefully evaluated. The overall increase in the combined typical bill of a single-family residential customer will be $7.12 per month (based on the average of 8,975 gallons of water used per month by typical residential customer).
In addition to the proposed rate adjustments, the City is planning to transition from the current bi-monthly billing cycle to monthly billing following implementation of the Smart Water Meter Program. Monthly billing is intended to provide customers with more timely and manageable billing information and offers several benefits compared to bi-monthly billing, including:
Improved ability for households to budget for and anticipate utility expenses Lower individual bill amounts (though billed more frequently), which may make bills easier to manage and pay on time
Earlier notification of leaks or unusual water use, allowing customers to take corrective action within approximately 30 days rather than waiting up to 60 days under the current billing cycle
When compared to neighboring cities, the typical Santa Ana customer will continue to pay a lower amount, on average, for water services as compared to other Orange County cities such as Garden Grove, La Habra, Fullerton, Tustin, Newport Beach, and San Clemente (Exhibit 4). Similarly, customers will continue to pay a lower amount, on average, for sewer service as compared to other Orange County cities such as Huntington Beach, Orange, Newport Beach, Fullerton, and San Clemente (Exhibit 5).
Staff recommends City Council authorize and direct staff to prepare all required documents necessary to proceed with the notification of proposed water and sewer rate Water and Sewer Rate Adjustment Authorization
January 20, 2026
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adjustments in compliance with Proposition 218 requirements. Proposed rates do not go into effect until approved by City Council at a future public hearing on or after March 17, 2026.
ENVIRONMENTAL IMPACT
There is no environmental impact associated with this action.
FISCAL IMPACT
Funding for the cost of preparing and mailing Proposition 218 compliance notices (Exhibit 3) is included in the FY 2025-26 budgets for both the Water and Sewer Enterprises and is available for expenditure.
Fiscal
Year
Accounting
Unit-
Account #
Fund
Description
Accounting Unit,
Account Description
Amount
FY 25-26 06017645-
63001
Water Water
Admin/Engineering.
Miscellaneous Operating
Expenses
$50,000
FY 25-26 05617640-
63001
Sanitary
Sewer Service
Sanitary Sewer Service.
Miscellaneous Operating
Expenses
$50,000
Total $100,000
EXHIBIT(S)
1. 2026 Water and Sewer Rate Study
2. Location Map
3. Proposition 218 Notice
4. Water Rate Comparison Chart
5. Sewer Rate Comparison Chart
Submitted By: Rodolfo Rosas, P.E., Acting Executive Director - Public Works Agency Approved By: Alvaro Nuñez, City Manager